FRANKLIN GOLD FUND, 497, 1995-02-21

FRANKLIN GOLD FUND
497, 1995-02-21

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SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN GOLD FUND
DATED DECEMBER 1, 1994

The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:

1. EXPENSE TABLE

Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."

2. MANAGEMENT OF THE FUND

Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.

3. HOW TO BUY SHARES OF THE FUND

a) The following is added at the end of the first paragraph:

The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.

b) Substitute the following for the sales charge table and the ensuing two
paragraphs:

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
------------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000...... 3.75% 3.90% 3.25%
$250,000 but less than $500,000...... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000... 2.25% 2.30% 2.00%
$1,000,000 or more .................. none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 1.00% on sales of $1 million but less than
$2 million, plus 0.80% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.

No front-end sales charge applies on investments of $1 million or more, but
a contingent deferred sales charge of 1% is imposed on certain redemptions
of investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge."

<PAGE>

charges and/or may not be subject to reduction) and (c) the U.S. mutual
funds in the Templeton Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund,
and Templeton Variable Products Series Fund (the "Templeton Funds").
(Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment
qualifies for a discount. References throughout the Prospectus, for purposes
of aggregating assets or describing the exchange privilege, refer to the
above descriptions.

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
certain designated retirement plans (excluding IRA and IRA rollovers),
certain non-designated plans, certain trust company and trust departments of
banks and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more. See definitions under
"Description of Special Net Asset Value Purchases" and as set forth in the
SAI.

c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, directors, trustees and full-time employees of the
Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from
that fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6)
certain unit investment trusts and unit holders of such trusts reinvesting
their distributions from the trusts in the Fund; (7) registered securities
dealers and their affiliates, for their investment account only; and (8)
registered personnel and employees of securities dealers and by their
spouses and family members, in accordance with the internal policies and
procedures of the employing securities dealer.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.

Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such distribution. To

<PAGE>

exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution.
In order to exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust Company (the
"Trust Company"), the Fund or Investor Services, within 120 days after the
plan distribution. A prospectus outlining the investment objectives and
policies of a fund in which the shareholder wishes to invest may be obtained
by calling toll free at 1-800/DIAL BEN (1-800/342-5236).

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the effect, if
any, of various payments made by the Fund or its investment manager on
arbitrage rebate calculations. If an investment by an eligible governmental
authority at net asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such
securities dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional
information.

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the
employer establishing the plan have 200 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments totals at least $1,000,000.#
Employee benefit plans not designated above or qualified under Section 401
of the Code ("non-designated plans") may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise

<PAGE>

exclusive discretionary investment authority and which are held in a
fiduciary, agency, advisory, custodial or similar capacity. Such purchases
are subject to minimum requirements with respect to amount of purchase,
which may be established by Distributors. Currently, those criteria require
that the amount invested or to be invested during the subsequent 13-month
period in this Fund or any of the Franklin Templeton Investments must total
at least $1,000,000. Orders for such accounts will be accepted by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
such order.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":

A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of
12 months of the calendar month following their purchase. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) shares representing amounts attributable
to capital appreciation of those shares held less than 12 months; (ii)
shares purchased with reinvested dividends and capital gain distributions;
and (iii) other shares held longer than 12 months; and followed by any
shares held less than 12 months, on a "first in, first out" basis.

The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.

Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales charge being
deducted from the total dollar amount redeemed.

FRANKLIN
GOLD FUND

PROSPECTUS DECEMBER 1, 1994

[LOGO]

777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN

Franklin Gold Fund (the "Fund") is a diversified, open-end management
investment company with the principal investment objective of capital
appreciation and a secondary objective of current income. The Fund will
concentrate its investments in securities of companies engaged in mining,
processing or dealing in gold or other precious metals, which is expected to
result in the investment of a substantial portion of its assets in foreign
securities.

This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.

A Statement of Additional Information ("SAI") concerning the Fund, dated
December 1, 1994, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be
of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors") at the address or
telephone number listed above.

This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

<PAGE>

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table.................... 2

Financial Highlights............. 4

About the Fund................... 4

Investment Objectives
and Policies of the Fund....... 5

Management of the Fund........... 8

Distributions to Shareholders.... 9

Taxation of the Fund and
Its Shareholders............... 11

How to Buy Shares of the Fund.... 12

Purchasing Shares of the Fund
in Connection with Retirement
Plans Involving Tax-Deferred
Investments.................... 18

Other Programs and Privileges
Available to Fund Shareholders. 20

Exchange Privilege............... 21

How to Sell Shares of the Fund... 24

Telephone Transactions........... 26

Valuation of Fund Shares......... 27

How to Get Information Regarding
an Investment in the Fund...... 28

Performance...................... 29

General Information.............. 29

Account Registrations............ 30

Important Notice Regarding
Taxpayer IRS Certifications.... 31

Portfolio Operations............. 32
</TABLE>

EXPENSE TABLE

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Fund for the fiscal year ended July 31, 1994.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................ 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends................. NONE
Deferred Sales Charge................................................ NONE
Redemption Fees...................................................... NONE
Exchange Fee (per transaction)....................................... $5.00*
</TABLE>

*$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.

<PAGE>

<TABLE>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees...................................................... 0.51%
12b-1 Fees........................................................... 0.22%+
Other Expenses:......................................................
Shareholder Servicing Costs................................. 0.08%
Reports to Shareholders..................................... 0.08%
Other....................................................... 0.09%
Total Other Expenses................................................. 0.25%
-----
Total Fund Operating Expenses........................................ 0.98%
=====
</TABLE>

+Annualized. Actual 12b-1 fees incurred by the Fund for the three months ended
July 31, 1994 were 0.05%. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charges permitted under
those same rules. See "Plan of Distribution" under "Management of the Fund" in
this Prospectus.

Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.

EXAMPLE

As required by SEC regulations, the following example illustrates the expenses,
including the initial sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period. As noted in the table above, the
Fund charges no redemption fees:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$55 $75 $97 $160
</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE
AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE
MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund and
only indirectly by shareholders as a result of their investment in the Fund. In
addition, federal regulations require the example to assume an annual return of
5%, but the Fund#s actual return may be more or less than 5%.

<PAGE>

FINANCIAL HIGHLIGHTS

The information for each of the five fiscal years in the period ended July 31,
1994 has been audited by Coopers & Lybrand, independent auditors, whose audit
report appears in the financial statements in the Fund's SAI. The remaining
figures, which are also audited, are not covered by the auditors# current
report. See the discussion "Reports to Shareholders" under "General
Information."

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE*
Net asset value at
beginning of year............. $15.63 $11.50 $12.71 $13.74 $12.17 $11.79 $17.07 $ 6.64 $ 8.28 $ 9.05
Net investment income........... 0.19 0.21 0.35 0.35 0.37 0.41 0.49 0.36 0.33 0.33
Net realized and unrealized
gains (losses) on securities.. (0.746) 4.147 (1.191) (0.956) 1.681 0.357 (4.845) 10.38 (1.66) (0.74)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.................... (0.556) 4.357 (0.841) (0.606) 2.051 0.767 (4.355) 10.74 (1.33) (0.41)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from net
investment income............. (0.194) (0.227) (0.369) (0.334) (0.481) (0.387) (0.53) (0.31) (0.31) (0.36)
Distributions from realized
capital gains................. - - - (0.090) - - (0.395) - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions............. (0.194) (0.227) (0.369) (0.424) (0.481) (0.387) (0.925) (0.310) (0.310) (0.360)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end of year.. $14.88 $15.63 $11.50 $12.71 $13.74 $12.17 $11.79 $17.07 $ 6.64 $ 8.28
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN**.................. (3.52%) 38.56% -6.87% -4.01% 16.87% 6.74% -26.16% 164.92% -16.85% -4.92%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year
(in 000's).................... $418,698 $394,704 $257,888 $277,397 $330,950 $275,341 $278,743 $350,580 $91,520 $120,859
Ratio of expenses to
average net assets............ 0.81% 0.62%+ 0.31%+ 0.75% 0.75% 0.78% 0.76% 0.84% 1.05% 0.94%
Ratio of net investment in-
come to average net assets.... 1.30% 1.89% 2.99% 2.78% 2.72% 3.56% 3.72% 3.33% 4.28% 3.69%
Portfolio turnover rate......... 1.46% 1.62% 0.26% 0.53% 2.98% 2.62% 7.27% 10.09% 2.90% 0.09%
</TABLE>

*Selected data for a share of capital stock outstanding throughout the year.

**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the maximum offering price and capital gains, if
any, at net asset value. Effective May 1, 1994, with the implementation of the
Rule 12b-1 distribution plan, as discussed in this Prospectus, the existing
sales charge on reinvested dividends has been eliminated.

+For the years ended July 31, 1993 and 1992, the investment manager reduced its
management fees incurred by the Fund. Had such action not been taken, the
ratios of operating expenses to average net assets would have been .75% and
.77%, respectively.

ABOUT THE FUND

Franklin Gold Fund, which changed its name from Research Capital Fund in
October 1983, is a diversified open-end management investment company, commonly
called a mutual fund. It was incorporated under the laws of California in 1968
and registered with the SEC under the Investment Company Act of 1940 (the "1940
Act").

<PAGE>

Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.50% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVES AND POLICIES OF THE FUND

The Fund's principal investment objective is capital appreciation. The Fund
seeks to attain this objective by purchasing securities with the potential to
increase in value, so that its own shares will in turn increase in value. The
Fund's secondary objective is to provide current income through the receipt of
dividends or interest from its investments. The payment of dividends may be a
consideration when the Fund purchases securities. These investment objectives
are fundamental policies of the Fund and may not be changed without shareholder
approval. Any such change may result in the Fund having investment objectives
different from the objectives which the shareholder considered appropriate at
the time of investment in the Fund.

Because the principal investment objective of the Fund is capital appreciation,
the Fund may invest in securities which will be subject to more risk than if it
purchased less volatile securities, if it is felt that the risk is justified by
the potential for appreciation. As in any other investment, there is no
assurance that the Fund's objectives will be attained.

In seeking to achieve its objectives, the Fund has adopted a fundamental policy
of concentrating its investments (which is defined as investing at least 25% of
its total assets in such securities) in securities of issuers engaged in
mining, processing or dealing in gold or other precious metals, such as silver,
platinum and palladium. Under normal circumstances, at least 65% of the value
of the Fund's total assets will be invested in securities of issuers engaged in
gold operations, including securities of gold mining finance companies, as well
as operating companies with long-, medium- or short-life mines.

The Fund anticipates that it will normally invest in common stocks, and
securities convertible into common stocks, such as convertible preferred,
convertible debentures, convertible rights and warrants (to the extent
permissible by the Fund's investment policies) and sponsored or unsponsored
American Depositary Receipts ("ADRs") for those securities, all of which may be
traded on a securities exchange or over-the-counter. In seeking income or
appreciation or in times when it is felt that a conservative or temporary
defensive investment policy is in order, the Fund may also purchase preferred
stocks and debt securities, such as notes, bonds, debentures or commercial
paper, any of which may or may not be rated by recognized securities rating
agencies. In those circumstances, the Fund may also place some of its cash
reserves in securities of the U.S. government and its agencies, commercial
paper (short-term debt securities of large corporations), or various bank debt
instruments, or repurchase agreements collateralized by such securities.

Because of the Fund's policy of investing primarily in securities of companies
engaged in gold mining, a substantial part of the Fund's assets is generally
invested in securities of companies domiciled or operating in one or more
foreign countries. The Fund generally has invested more than 50% of its total
assets in the securities of corporations located outside the United States.
While the Fund intends to acquire securities of foreign issuers only where
there are public trading markets for such securi-

<PAGE>

ties, such investments may tend to reduce the liquidity of the Fund's portfolio
in the event of internal problems in such foreign countries or deteriorating
relations between the United States and such countries. Due to current internal
conditions in South Africa and the two-tiered currency system, the Fund's
indirect investments in that country, which currently constitute approximately
30.30% of its portfolio, may be subject to somewhat greater risk than an
investment in a country without such restrictions.

Investment in the Fund's shares requires consideration of certain factors that
are not normally involved in investments solely in U.S. securities. Among other
things, the financial and economic policies of some foreign countries in which
the Fund may invest are not as stable as in the United States. Furthermore,
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
corporate issuers. There may also be less government supervision and regulation
of foreign securities exchanges, brokers and issuers than exist in the United
States. Restrictions and controls on investment in the securities markets of
some countries may have an adverse effect on the availability and costs to the
Fund of investments in those countries. In addition, there may be the
possibility of expropriations, foreign withholding taxes, confiscatory
taxation, political, economic or social instability or diplomatic developments
which could affect assets of the Fund invested in issuers in foreign countries.

There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers.
Foreign securities markets generally have substantially less volume than the
New York Stock Exchange and some foreign government securities may be less
liquid and more volatile than U.S. government securities. Transaction costs on
foreign securities exchanges may be higher than in the United States, and
foreign securities settlements may, in some instances, be subject to delays and
related administrative uncertainties. The holding of foreign securities,
however, may be limited by the Fund to avoid investment in certain Passive
Foreign Investment Companies ("PFIC") and the imposition of a PFIC tax on the
Fund resulting from such investments.

For further details regarding the Fund's investments in the securities of
foreign issuers, please see the SAI.

The Fund's policies allow it to invest in gold bullion and foreign currency in
the form of gold coins, and to make loans of its portfolio securities under
certain circumstances. These investment techniques have not been used recently,
but remain available in the event it is determined that they could help the
Fund achieve its objectives, subject to diversification restrictions discussed
in the SAI.

As more fully discussed in the SAI, the Fund may enter into options (including
writing covered call options), futures and options on financial futures
transactions. For state law purposes, the Fund will commit no more than 5% of
its assets to premiums when purchasing put options. The premium paid by the
Fund when purchasing a put option will be recorded as an asset in the Fund's
statement of assets and liabilities. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of
trading on the New York Stock Exchange) or, in the absence of such sale, the
latest bid price. The asset will be extinguished upon expiration of the option,
the writing of an identical option in a closing transaction, or the delivery of

<PAGE>

the underlying security or currency upon the exercise of the option.

The Fund may invest in securities including corporate bonds, notes and
preferred stocks that are convertible into common stock or other securities
which provide an opportunity for equity participation. These securities are
convertible at a stated price within a specified period of time and are
generally senior to common stocks in a corporation's capital structure,
although they are usually subordinated to similar nonconvertible securities.
Convertible securities provide a fixed-income stream and the opportunity,
through their conversion feature, to participate in the capital appreciation
resulting from a market price advance in the convertible security's underlying
common stock. A convertible security tends to increase in market value when
interest rates decline and tends to decrease in value when interest rates rise.
The price of a convertible security is also influenced by the market value of
the security's underlying common stock and tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the market
value of the underlying stock declines.

Of course, there are risks involved in all investments and an investment in
shares of the Fund is no exception. Because the value of Fund shares
fluctuates, the value of an account may at any time be more or less than its
cost. Due to the Fund's policy of concentrating its investments in gold and
precious metal-related issuers, investments in the Fund's shares may involve
special considerations, including: fluctuations in the price of gold; the
potential effect of the concentration of the sources of supply of gold and over
control of the sale of gold; changes in U.S. or foreign tax, currency or mining
laws; increased environmental costs; and unpredictable monetary policies and
economic and political conditions. Also, even companies with strong balance
sheets may be adversely impacted by lower profitability from lower gold prices.
In addition, the issuers of unsponsored ADRs are not obligated to disclose
material information in the United States and, therefore, there may be less
information available to the investing public than with sponsored ADRs. The
investment manager will attempt to independently accumulate and evaluate
information with respect to the issuers of the underlying securities of
sponsored and unsponsored ADRs to attempt to limit the Fund's exposure to the
market risk associated with such investments.

As discussed above, the Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Fund might also incur disposition costs in liquidating the collateral. The
Fund, however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale
(the collateral) will be held on behalf of the Fund by a custodian approved by
the Fund's Board of

<PAGE>

Directors and will be held pursuant to a written agreement.

It is the policy of the Fund that repurchase agreements having maturities
longer than seven days and securities subject to legal or contractual
restrictions on resale or for which there are no readily available market
quotations may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund.

While the Fund invests in foreign securities, it is generally not its intention
to invest in foreign equity securities of issuers which meet the U.S. tax
definition of a PFIC. To the extent that the Fund makes such an investment,
however, the Fund may be subject to both an income tax and an additional tax in
the form of an interest charge with respect to such investment. To the extent
possible, the Fund will avoid such taxes by not investing in PFIC securities or
by adopting other tax strategies for any PFIC securities it does purchase.

The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more
information concerning the policies discussed herein, please see the SAI.

HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES

The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund
decrease in value, the value of the shareholder's shares will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by the Fund.

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the
value of Fund shares will fluctuate with movements in the broader equity and
bond markets as well. A decline in the stock market of any country in which the
Fund is invested may also be reflected in declines in the Fund's share price.
Changes in currency valuations will also affect the price of Fund shares.
History reflects both decreases and increases in worldwide stock markets and
currency valuations which may reoccur unpredictably in the future.

MANAGEMENT OF THE FUND

The Board of Directors has the primary responsibility for the overall
management of the Fund and for electing the officers of the Fund who are
responsible for administering its day-to-day operations.

Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R.
Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of
Resources' outstanding shares. Through its subsidiaries, Resources is engaged
in various aspects of the financial services industry. Advisers acts as
investment manager or administrator to 33 U.S. registered investment companies
(111 separate series) with aggregate assets of over $75 billion.

Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.

<PAGE>

During the fiscal year ended July 31, 1994, fees totaling 0.51% of the average
monthly net assets of the Fund were paid to Advisers.

Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.

Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.

During the fiscal year ended July 31, 1994, expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totaled 0.98% of the
average monthly net assets of the Fund.

PLAN OF DISTRIBUTION

The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or
others for all expenses incurred by Distributors or others in the promotion and
distribution of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount which the Fund may
pay to Distributors or others for such distribution expenses is 0.25% per annum
of the average daily net assets of the Fund, payable on a quarterly basis. All
expenses of distribution and marketing in excess of 0.25% per annum will be
borne by Distributors, or others who have incurred them, without reimbursement
from the Fund. The Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund, Advisers or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within
the context of Rule 12b-1. The payments under the Plan are included in the
maximum operating expenses which may be borne by the Fund.

DISTRIBUTIONS TO SHAREHOLDERS

There are two types of distributions which the Fund may make to its
shareholders:

1. Income dividends. The Fund receives income in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Fund's operations, is its net investment income from
which income dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.

2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term

<PAGE>

and net long-term capital gains (after taking into account any net capital
loss carryovers) may generally be made once a year in December to reflect
any net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed net capital gains
from the prior fiscal year. The Fund may make more than one distribution
derived from net short-term and net long-term capital gains in any year or
adjust the timing of these distributions for operational or other reasons.

DISTRIBUTION DATE

Although subject to change by the Board of Directors, without prior notice to
or approval by shareholders, the Fund's current policy is to declare regular
semi-annual income dividends in May and November for shareholders of record on
the last business day of that month, payable on or about the 15th day of the
following month. The amount of income dividend payments by the Fund is
dependent upon the amount of net income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board of
Directors. Fund shares are quoted ex-dividend on the first business day
following the record date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.

In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.

DIVIDEND REINVESTMENT

Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the SAI for
more information.

Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.

DISTRIBUTIONS IN CASH

A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial

<PAGE>

processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value.

TAXATION OF THE FUND AND ITS SHAREHOLDERS

The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.

The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). By distributing all of its net investment income, net foreign
currency gains recharacterized as ordinary income and net realized short-term
and long-term capital gain for a fiscal year in accordance with the timing
requirements imposed by the Code and by meeting certain other requirements
relating to the sources of its income and diversification of its assets, the
Fund will not be liable for federal income or excise taxes.

For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.

Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain for purposes of
computing a shareholder's income taxes regardless of the length of time the
shareholder has owned Fund shares and regardless of whether such distributions
are received in cash or in additional shares.

Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.

It is anticipated that only a small portion, if any, of the Fund's dividends
during the current fiscal year will qualify for the corporate
dividends-received deduction because of the Fund's level of investment in
securities of foreign corporations. To the extent that the Fund pays dividends
which qualify for this deduction, the availability of the deduction is subject
to certain holding period and debt financing restrictions imposed under the
Code on the corporation claiming the deduction. These restrictions are
discussed in the SAI.

The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of
foreign taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata

<PAGE>

share of foreign source income (including any foreign taxes paid by the fund),
and (ii) entitled to either deduct their share of such foreign taxes in
computing their taxable income or to claim a credit for such taxes against
their U.S. income tax, subject to certain limitations under the Code.
Shareholders will be informed by the Fund at the end of each calendar year
regarding the availability of any credits and the amount of foreign source
income (including any foreign taxes paid by the Fund) to be included in their
income tax returns. Shareholders should consult their tax advisor as to the
availability of foreign tax payments as deductions on their tax return.

The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.

Shareholders should also consult their tax advisors with respect to the tax
consequences of a redemption or exchange of Fund shares or the applicability of
any state and local intangible property or income taxes on their shares of the
Fund and distributions and redemption proceeds received from the Fund.

HOW TO BUY SHARES OF THE FUND

Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares.

PURCHASE PRICE OF FUND SHARES

Shares of the Fund are offered at the public offering price, which is the net
asset value per share plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price will be
calculated to four decimal places. On orders for less than 100,000 shares, the
offering price will be calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset value per share
is included under the caption "Valuation of Fund Shares."

Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.

<PAGE>

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.

On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. All sales charges on purchases of $1,000,000 or
more are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.

The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group
(except Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments
may not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on
the excess over $2,500,000. Purchases pursuant to the Rights of Accumulation
will be at the applicable sales charge of 1% or more until the additional
purchase, plus the value of the account or the amount previously invested, less
redemptions, exceeds $2,500,000, in which event the sales charge on the excess
will be calculated as stated above. Sales charge reductions based upon
purchases in more than one of the funds in the Franklin Group or Templeton
Group (the "Franklin/Templeton Group") may be effective only after notification
to Distributors that the investment qualifies for a discount.

Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising,

<PAGE>

sales campaigns and/or shareholder services and programs regarding one or more
of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of the Fund's shares
to qualify for this compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned additional
compensation is paid for by the Fund or its shareholders.

Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the SAI.

QUANTITY DISCOUNTS IN SALES CHARGES

Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.

In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:

1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.

2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of sales
charge. Any redemptions made by the shareholder during the 13-month period will
be subtracted from the amount of the purchases

<PAGE>

for purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge as specified below,
depending upon the amount actually purchased (less redemptions) during the
period. An investor who executes a Letter of Intent prior to a change in the
sales charge structure for the Fund will be entitled to complete the Letter at
the lower of (i) the new sales charge structure, or (ii) the sales charge
structure in effect at the time the Letter was filed with the Fund.

AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, the investor will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge which would have applied to
the aggregate purchases if the total of such purchases had been made at a
single time. Upon such remittance, the reserved shares held for the investor's
account will be deposited to an account in the name of the investor or
delivered to the investor or to the investor's order. If within 20 days after
written request such difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize such difference will be
made. In the event of a total redemption of the account prior to fulfillment of
the Letter of Intent, the additional sales charge due will be deducted from the
proceeds of the redemption and the balance will be forwarded to the investor.
By completing the Letter of Intent section of the Shareholder Application, an
investor grants to Distributors a security interest in the reserved shares and
irrevocably appoints Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares for the purpose of
paying any additional sales charge due. Purchases under the Letter of Intent
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.

Additional terms concerning the offering of the Fund's shares are included in
the SAI.

<PAGE>

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.

A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.

If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both
the check and payroll deduction data are received in required form by the Fund.

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently, those criteria require
that the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent 13-month period in the
Fund or another company or companies in the Franklin/Templeton Group totals at
least $1,000,000. Employee savings plans and employee benefit plans not
qualified under Section 401 of the Code may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for qualified
groups previously described under Group Purchases which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses. If
investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a payment, out of their own resources, to such
dealer in an amount not to exceed 1% of the amount invested.

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount

<PAGE>

invested or to be invested during the subsequent 13-month period in this Fund
or any other company in the Franklin/Templeton Group must total at least
$1,000,000. Orders for such accounts will be accepted by mail accompanied by a
check, or by telephone or other means of electronic data transfer directly from
the bank or trust company, with payment by federal funds received by the close
of business on the next business day following such order. If an investment by
a trust company or bank trust department at net asset value is made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make payment, out of their own resources, to such
dealer in an amount not to exceed 0.25% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment in the same
fund is made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.

Shares of the Fund may be purchased at net asset value by investors who have,
within the past 60 days, redeemed an investment in a registered management
investment company which charges a contingent deferred sales charge and which
has investment objectives similar to those of the Fund.

Shares of the Fund may also be purchased at net asset value by (1) officers,
directors and full-time employees of the Fund or any fund in the Franklin Group
of Funds or the Templeton Group, the Manager and Distributors and affiliates of
such companies, if they have been such for at least 90 days, and by their
spouses and family members, (2) registered securities dealers and their
affiliates, for their investment account only, and (3) registered personnel and
employees of securities dealers and by their spouses and family members, in
accordance with the internal policies and procedures of the employing
securities dealer. Such sales are made upon the written assurance of the
purchaser that the purchase is made for investment purposes and that the
securities will not be transferred or resold except through redemption or
repurchase by or on behalf of the Fund. Employees of securities dealers must
obtain a special application from their employers or from Franklin's Sales
Department in order to qualify.

Shares of the Fund may be purchased at net asset value by anyone who has taken
a distribution from

<PAGE>

an existing retirement plan already invested in the Franklin Group of Funds or
the Templeton Group (including former participants of the Franklin/Templeton
Profit Sharing 401(k) plan). In order to exercise this privilege, a written
order for the purchase of shares of the Fund must be received by Franklin
Templeton Trust Company ("FTTC"), the Fund or Investor Services, within 120
days after the plan distribution. A prospectus outlining the investment
objectives and policies of a fund in which the shareholder wishes to invest may
be obtained by calling toll free at 1-800/DIAL BEN (1-800/342-5236).

Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency
thereof which has determined that the Fund is a legally permissible investment
and which is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental
authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL
INVESTMENTS FOR THEM. Municipal investors considering investment of proceeds of
bond offerings into the Fund should consult with expert counsel to determine
the effect, if any, of various payments made by the Fund or its investment
manager on arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.

GENERAL

Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.

PURCHASING SHARES OF THE FUND IN CONNECTION WITH
RETIREMENT PLANS INVOLVING TAX-DEFERRED INVESTMENTS

Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an existing retirement plan, or FTTC may
provide the plan documents and trustee or custodian services. A plan document
must be adopted in order for a plan to be in existence.

FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and Internal Revenue Service ("IRS") requirements. Please note that
separate applications, other than the one contained in this Prospectus, must be
used to establish an FTTC retirement account. To obtain a retirement plan
brochure or application, call toll free 1-800/DIAL BEN (1-800/342-5236).

The Franklin IRA is an individual retirement account in which the
contributions, annually limited to the lesser of $2,000 or 100% of an
individual's earned compensation, accumulate on a tax-deferred basis until
withdrawn. Under the current tax law, individuals who (or whose spouses) are
covered by a company retirement plan (termed "active participants") may be
restricted in the amount they may claim as an IRA deduction on their returns.
The IRA deduction is gradually

<PAGE>

reduced to the extent that a taxpayer's adjusted gross income exceeds certain
specified limits.

Two IRAs, with a combined limit of $2,250 or 100% of earned compensation, may
be established by a married couple in which only one spouse is a wage earner.
The $2,250 may be split between the two IRAs, so long as no more than $2,000 is
contributed to either one for a given tax year.

A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such
as a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the
distribution will be exempt from 20% mandatory federal withholding, a new
withholding law enacted in 1993.

The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same time, provide for a tax deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of compensation* per employee. The
SAR-SEP allows employees to contribute a portion of their salary to an IRA on a
pre-tax basis through salary deferrals. The maximum annual salary deferral
limit for a SAR-SEP is the lesser of 15% of compensation (adjusted for
deferrals) or $9,240 (1994 limit; indexed for inflation).

The Franklin 403(b) Retirement Plan is a salary deferral plan for employees
of certain non-profit and educational institutions [Section 501(c)(3)
organizations and public schools]. The 403(b) Plan allows participants to
determine the annual amount of salary they wish to defer. The maximum annual
salary deferral amount is generally the lesser of 25% of compensation (adjusted
for deferrals) or $9,500.

The Franklin Business Retirement Plans provide employer's with additional
retirement plan options and may be used individually, in combination, or with
custom designed features. The Profit Sharing Plan allows an employer to make
contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows
the employer to contribute up to the lesser of $30,000 or 25% of compensation*
per employee; however, contributions are required annually at the rate
(percentage) elected by the employer at the outset of the plan. In order to
achieve a combined contribution rate of 25%, while maintaining a certain degree
of flexibility, employers may establish both a Profit Sharing Plan and a Money
Purchase Pension Plan (with a fixed contribution rate of 10%).

FTTC can add optional provisions to the Profit Sharing and Money Purchase
Pension Plans described above and provide Defined Benefit, Target Benefit, and
401(k) Plans on a custom designed basis. Business Retirement Plans, whether
standard or custom designed, may require an annual report (Form 5500) to be
filed with the IRS.

Redemptions from any Franklin retirement plan accounts require the completion
of specific distribution forms to comply with IRS regulations. Please see "How
to Sell Shares of the Fund."

Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.

*The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.

<PAGE>

OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS

CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).

SHARE CERTIFICATES

Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A lost, stolen or destroyed certificate cannot
be replaced without obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the securities dealer.

CONFIRMATIONS

A confirmation statement will be sent to each shareholder semi-annually to
reflect the dividends reinvested during that period and after each other
transaction which affects the shareholder's account. This statement will also
show the total number of shares owned by the shareholder, including the number
of shares in "plan balance" for the account of the shareholder.

AUTOMATIC INVESTMENT PLAN

Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.

The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a loss.

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw is $50 per withdrawal transaction,
although this is merely the minimum amount allowed under the plan and should
not be mistaken for a recommended amount. The plan may be established on a
monthly, quarterly, semi-annual or annual basis. If the shareholder establishes
a plan, any capital gain distributions and income dividends paid by the Fund
will be reinvested for the shareholder's account in additional shares at net
asset value. Payments will then be made from the liquidation of shares at net
asset value on the day of the transaction (which is generally the first
business day of the month in which the payment is scheduled) with payment
generally received by the

<PAGE>

shareholder three to five days after the date of liquidation. By completing the
"Special Payment Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may direct the
selected withdrawals to another fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days
for initial processing. Withdrawals which may be paid in the interim will be
sent to the address of record. Liquidation of shares may reduce or possibly
exhaust the shares in the shareholder's account, to the extent withdrawals
exceed shares earned through dividends and distributions, particularly in the
event of a market decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining balance will be sent to
the shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the amount withdrawn
under the plan may be more than the shareholder's actual yield or income, part
of the payment may be a return of the shareholder's investment.

The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect. A
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.

INSTITUTIONAL ACCOUNTS

There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact Franklin's Institutional Services Department at 1-800/321-8563.

EXCHANGE PRIVILEGE

The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives and policies. The
shares of most of these investment companies are offered to the public with a
sales charge. If a shareholder's investment objective or outlook for the
securities markets changes, the Fund shares may be exchanged for shares of
other mutual funds in the Franklin Group of Funds or the Templeton Group (as
defined under "How to Buy Shares of the Fund") which are eligible for sale in
the shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:

<PAGE>

EXCHANGES BY MAIL

Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.

EXCHANGES BY TELEPHONE

SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY
EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT
1-800/632-2301 OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT
1-800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.

The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to "Telephone
Transactions - Verification Procedures."

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the
other exchange procedures discussed in this section, including the procedures
for processing exchanges through securities dealers.

EXCHANGES THROUGH SECURITIES DEALERS

As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income
dividends and capital gain distributions will be transferred to the fund being
exchanged into and will be invested at net asset value. Because the exchange is
considered a redemption and purchase of shares, the shareholder may realize a
gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and in the SAI.

<PAGE>

There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.

If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.

The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.

RETIREMENT ACCOUNTS

Franklin/Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."

TIMING ACCOUNTS

Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.

RESTRICTIONS ON EXCHANGES

In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.

The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern who: (i) makes
an exchange request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) makes more than two exchanges out of the Fund
per calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.

The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected.
A shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.

The Fund and Distributors also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.

<PAGE>

HOW TO SELL SHARES OF THE FUND

A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:

REDEMPTIONS BY MAIL

Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:00 p.m. Pacific time) each day that the New York
Stock Exchange (the "Exchange") is open for business will receive the price
calculated on the following business day. Shareholders are requested to provide
a telephone number(s) where they may be reached during business hours, or in
the evening if preferred. Investor Services' ability to contact a shareholder
promptly when necessary will speed the processing of the redemption.

TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:

(1) the proceeds of the redemption are over $50,000;

(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;

(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;

(4) share certificates, if the redemption proceeds are in excess of $50,000; or

(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.

Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; (3)
securities dealers which are members of a national securities exchange or a
clearing agency or which have minimum net capital of $100,000; or (4)
institutions that participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee medallion program. A
notarized signature will not be sufficient for the request to be in proper
form.

Where shares to be redeemed are represented by share certificates, the request
for redemption must

<PAGE>

be accompanied by the share certificate and a share assignment form signed by
the registered shareholders exactly as the account is registered, with the
signature(s) guaranteed as referenced above. Shareholders are advised, for
their own protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.

Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:

Corporation - (1) Signature guaranteed letter of instruction from the
authorized officer(s) of the corporation and (2) a corporate resolution.

Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.

Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.

Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.

Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.

Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.

REDEMPTIONS BY TELEPHONE

Shareholders who complete the Franklin/Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT
THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND
INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT
INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE
RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."

For shareholder accounts with a completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time
on any business day will be processed that same day. The redemption check will
be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.

<PAGE>

REDEEMING SHARES THROUGH SECURITIES DEALERS

The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a dealer
or similar agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a securities dealer, the redemption price
will be the net asset value next calculated after the shareholder's securities
dealer receives the order which is promptly transmitted to the Fund, rather
than on the day the Fund receives the shareholder's written request in proper
form. These documents, as described in the preceding section, are required even
if the shareholder's securities dealer has placed the repurchase order. After
receipt of a repurchase order from the securities dealer, the Fund will still
require a signed letter of instruction and all other documents set forth above.
A shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a securities dealer and the dealer's name.
Details of the dealer-ordered trade, such as trade date, confirmation number,
and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents
required to complete ("settle") the repurchase in proper form. The redemption
proceeds will not earn dividends or interest during the time between receipt of
the dealer's repurchase order and the date the redemption is processed upon
receipt of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's securities dealer
may charge a fee for handling the order. The SAI contains more information on
the redemption of shares.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption. In addition, the right of redemption may be suspended
or the date of payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC that trading on the
Exchange is restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount received may
be more or less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Fund.

RETIREMENT ACCOUNTS

Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement
Plans Department to obtain the necessary forms.

OTHER

For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.

TELEPHONE TRANSACTIONS

Shareholders of the Fund and their investment representative of record, if any,
may be able to exe-

<PAGE>

cute various transactions by calling Investor Services at 1-800/632-2301.

All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares
in one account to another identically registered account in the Fund, and (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described under "How to Sell
Shares of the Fund - Redemptions by Telephone" will be able to redeem shares of
the Fund.

VERIFICATION PROCEDURES

The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the
purpose of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone
are genuine, the requested transaction will not be executed, and neither the
Fund nor Investor Services will be liable for any losses which may occur
because of a delay in implementing a transaction.

RESTRICTED ACCOUNTS

Telephone redemptions and dividend option changes may not be accepted on FTTC
retirement accounts. To assure compliance with all applicable regulations,
special forms are required for any distribution, redemption, or dividend
payment. While the telephone exchange privilege is extended to
Franklin/Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans. Changes to dividend options must also
be made in writing.

To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts.

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to
the Fund as detailed elsewhere in this Prospectus.

Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.

The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.

VALUATION OF FUND SHARES

The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry
daily quotations of the prior trading

<PAGE>

day's closing "bid" (net asset value) and "ask" (offering price, which includes
the maximum sales charge of the Fund).

The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued and dividends are recorded
on the ex-dividend date. Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and ask
prices. Over-the-counter portfolio securities for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Portfolio securities
underlying actively traded call options are valued at their market price as
determined above. The current market value of any option held by the Fund is
its last sale price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract#s market value. Other securities for which market quotations are
readily available are valued at the current market price, which may be obtained
from a pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued
at fair value as determined following procedures approved by the Board of
Directors. All money market instruments with a maturity of more than 60 days
are valued at current market, as discussed above. All money market instruments
with a maturity of 60 days or less are valued at their amortized cost, which
the Board of Directors has determined in good faith constitutes fair value for
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the directors determine that it does not constitute
fair value for such purposes. With the approval of directors, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the
above described functions.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND

Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R)
by calling the automated Franklin TeleFACTS(R) system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 01 followed by the # sign,

<PAGE>

when requested to do so by the automated operator. The TeleFACTS system is also
available for processing exchanges. See "Exchange Privilege."

To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:

<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
--------------- ------------- ---------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

PERFORMANCE

Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including various expressions of
total return. They may occasionally cite statistics to reflect its volatility
or risk.

Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed
as a percentage of the purchase price.

Performance figures are based upon past performance, reflect all recurring
charges against Fund income and will assume the payment of the maximum sales
charge on the purchase of shares. When there has been a change in the sales
charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures
should not be considered to represent what an investment may earn in the future
or what the Fund's total return may be in any future period.

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

The Fund's fiscal year ends July 31. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Fund at the telephone number or address set forth on the cover
page of this Prospectus.

<PAGE>

Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.

ORGANIZATION

The Fund's authorized capital stock consists of 100,000,000 shares of common
stock of $0.10 par value. All shares are of one class, have one vote and, when
issued, are fully paid and nonassessable. All shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive or
conversion rights.

VOTING RIGHTS

Shares of the Fund have cumulative voting rights which means that in all
elections of directors, each shareholder has the right to cast a number of
votes equal to the number of shares owned multiplied by the number of directors
to be elected at such election and each shareholder may cast the whole number
of votes for one candidate or distribute such votes among two or more
candidates.

The Fund does not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Directors or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of directors such as
that provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has been in existence for at least 12 months and has
a value of less than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at
least six months, provided advance notice is given to the shareholder. More
information is included in the SAI.

OTHER INFORMATION

Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).

"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.

ACCOUNT REGISTRATIONS

An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.

Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.

A trust designation such as "trustee" or "in trust for" should only be used if
the account is being

<PAGE>

established pursuant to a legal, valid trust document. Use of such a
designation in the absence of a legal trust document may cause difficulties and
require court action for transfer or redemption of the funds.

Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."

Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer.
Both the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.

The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee,
or both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near
future, include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.

Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.

IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS

Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt shareholders who
have not provided a correct taxpayer identification number ("TIN") and made
certain required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a
securities dealer notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.

The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close
an account by redeeming its shares in full at the

<PAGE>

then-current net asset value upon receipt of notice from the IRS that the TIN
certified as correct by the shareholder is in fact incorrect or upon the
failure of a shareholder who has completed an "awaiting TIN" certification to
provide the Fund with a certified TIN within 60 days after opening the account.

PORTFOLIO OPERATIONS

The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio: R. Martin Wiskemann since 1972 and Suzanne Willoughby
Killea since January 1994.

R. Martin Wiskemann
Senior Vice President of Advisers

Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of Zurich, Switzerland. He has been with Advisers since 1972 and,
prior thereto, he was a securities analyst at Laird, Bissell & Meed and an
investment manager with Winfield & Company. Mr. Wiskemann is a member of
several securities industry related committees and associations.

Suzanne Willoughby Killea
Portfolio Manager of Advisers

Ms. Killea holds a Master of Business Administration degree from Stanford
University. She earned her Bachelor of Arts degree in architecture from
Princeton University. Prior to joining Franklin, Ms. Killea worked as a summer
intern with Dillon Read & Co., Inc. (1990) and Dodge & Cox (1989), and for five
years as a broker with the Rubicon Group, a commercial real estate services
firm.

32
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN GOLD FUND
DATED DECEMBER 1, 1994

1. The following substitutes for the subsection "Purchases at Net Asset Value"
under "Additional Information Regarding Fund Shares":

ADDITIONAL INFORMATION REGARDING PURCHASES

Special Net Asset Value Purchases. As discussed in the Prospectus under "How
to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase shares of the Fund
without a front-end sales charge ("net sales") or a contingent deferred
sales charge. Distributors or one of its affiliates may make payments, out
of its own resources, to securities dealers who initiate and are responsible
for such purchases, as indicated below. As a condition for these payments,
Distributors or its affiliates may require reimbursement from the securities
dealers with respect to certain redemptions made within 12 months of the
calendar month following purchase, as well as other conditions, all of which
may be imposed by an agreement between Distributors, or its affiliates, and
the securities dealer.

The following amounts may be paid by Distributors or one of its affiliates,
out of its own resources, to securities dealers who initiate and are
responsible for (i) purchases of most equity and taxable income Franklin
Templeton Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but
less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more; and (ii) purchases of most taxable income
Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on
sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or
more. These payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases made at net asset value by
certain trust companies and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of
$10 million or more, Distributors, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.

Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the Prospectus. At any time
within 90 days after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder Application, with
the Letter of Intent section completed, may be filed with the Fund. After
the Letter of Intent is filed, each additional investment will be entitled
to the sales charge applicable to the level of investment indicated on the
Letter. Sales charge reductions based upon purchases in more than one of the
Franklin Templeton Funds will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds acquired more than 90 days before
the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward
adjustment in the sales charge. Any redemptions made by the shareholder,
other than by a designated benefit plan, during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter
of Intent is not completed within the 13-month period, there will be an
upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. The upward adjustment does
not apply to designated benefit plans. An investor who executes a Letter of
Intent prior to a change in the sales charge structure for the Fund will be
entitled to complete the Letter of Intent at the lower of (i) the new sales
charge structure; or (ii) the sales charge structure in effect at the time
the Letter of Intent was filed with the Fund.

As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the
total purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in the name of
the investor or delivered to the investor or the investor's order. If the
total purchases, less redemptions, exceed the amount specified under the
Letter of Intent and is an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made pursuant to the
Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or
the dollar amount of the total purchases. If the total purchases, less
redemptions, are less than the amount specified under the Letter, the
investor will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge
which would have applied to the aggregate purchases if the total of such
purchases

<PAGE>

had been made at a single time. Upon such remittance the reserved shares
held for the investor's account will be deposited to an account in the name
of the investor or delivered to the investor or to the investor's order. If
within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize
such difference will be made. In the event of a total redemption of the
account prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption, and the
balance will be forwarded to the investor.

If a Letter of Intent is executed on behalf of a benefit plan (such plans
are described under "Purchases at Net Asset Value" in the Prospectus), the
level and any reduction in sales charge for these designated benefit plans
will be based on actual plan participation and the projected investments in
the Franklin Templeton Funds under the Letter of Intent. Benefit plans are
not subject to the requirement to reserve 5% of the total intended purchase,
or to any penalty as a result of the early termination of a plan, nor are
benefit plans entitled to receive retroactive adjustments in price for
investments made before executing the Letter of Intent.

2. The paragraph "Reinvestment Date" under "Additional Information Regarding
Fund Shares" is substituted with the following language:

REINVESTMENT DATE

Shares acquired through the reinvestment of dividends will be purchased at
the net asset value determined on the business day following the dividend
record date (sometimes known as "ex-dividend date"). The processing date for
the reinvestment of dividends may vary from month to month, and does not
affect the amount or value of the shares acquired.

<PAGE>
FRANKLIN
GOLD
FUND

STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
DECEMBER 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Fund (See also the
Prospectus "About the Fund,"
"General Information")........... 2

The Fund's Investment Objectives and
Policies (See also the Prospectus
"Investment Objectives and Policies
of the Fund").................... 2

Special Considerations as a Result
of the Fund's Investment Policies 6

Investment Restrictions........... 7

Officers and Directors............ 8

Investment Advisory and Other
Services (See also the Prospectus
"Management of the Fund")......... 11

The Fund's Policies Regarding Brokers
Used on Portfolio Transactions.... 12

Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")....... 13

Additional Information Regarding
Taxation.......................... 15

The Fund's Underwriter............. 17

General Information................ 19

Financial Statements............... 23
</TABLE>

Franklin Gold Fund is a diversified, open-end management investment company
with the principal investment objective of capital appreciation and a secondary
objective of current income. The Fund will concentrate its investments in
securities of companies engaged in mining, processing or dealing in gold or
other precious metals, which is expected to result in the investment of a
substantial portion of its assets in the securities of foreign issuers.

A Prospectus for the Fund dated December 1, 1994, as may be amended from time
to time, provides the basic information an investor should know before
investing in the Fund and may be obtained without charge from the Fund or from
its principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number listed above.

THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL
INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS.

<PAGE>

ABOUT THE FUND

Franklin Gold Fund is a diversified, open-end management investment company,
commonly called a "mutual fund." It was incorporated under the laws of the
state of California in 1968.

THE FUND'S INVESTMENT
OBJECTIVES AND POLICIES

As noted in the Prospectus, the principal investment objective of the Fund is
capital appreciation. That is, the Fund seeks to purchase securities with the
potential to increase in value, so that shares of the Fund will in turn
increase in value. The secondary objective is to provide current income through
the receipt of dividends or interest from its investments. The payment of
dividends may be a consideration when the Fund purchases securities.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

Concentration of Investments. As a fundamental policy, the Fund intends to
concentrate its investments in securities of issuers engaged in mining,
processing or dealing in gold or other precious metals, such as silver,
platinum and palladium. Such investments may include securities of gold mining
finance companies, as well as operating companies with long-life mines,
medium-life mines or short-life mines. Accordingly, the Fund will have at least
25% of the value of its assets invested in such securities, except for
temporary periods when unusual and adverse economic conditions exist in that
industry, and it may invest up to 100% of the value of its assets in such
securities. Under normal circumstances, at least 65% of the Fund's assets will
be invested in securities of issuers engaged in gold operations, including
securities of gold mining finance companies, as well as operating companies
with long-, medium- or short-life mines. On July 31, 1994, approximately 81% of
the Fund's assets were invested in such securities.

Foreign Securities. As a result of the concentration of the Fund's investments
in gold and precious metal-related issuers, it is expected to invest a
substantial portion of its assets in foreign securities, that is, securities
issued by companies domiciled and operating outside the U.S. or securities
issued by foreign governments. Although the Fund is not obligated to do so, the
Fund presently expects that under normal conditions more than 50% of the value
of its assets may be invested in foreign securities. At any particular time a
substantial portion of the Fund's assets may be invested in companies domiciled
or operating in one or a very few foreign countries. The Fund retains the
flexibility, however, to invest some or all of its assets in U.S. securities
when the investment manager concludes that investments in U.S. companies are
more likely to accomplish the Fund's objectives. On July 31, 1994,
approximately 71% of the Fund's assets were invested in securities of foreign
issuers in the following countries: 30.3% in South Africa; 9.5% in Australia;
27.3% in Canada; 1.5% in Great Britain; and 2.2% in Ghana.

When purchasing foreign securities, the Fund will ordinarily purchase
securities which are traded in the United States or purchase sponsored or
unsponsored American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. A sponsored ADR is an
ADR in which establishment of the issuing facility is brought about by the
participation of the issuer and the depository institution pursuant to a
deposit agreement which sets out the rights and responsibilities of the issuer,
the depository and the ADR holder. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, thereby ensuring that ADR holders will be able to
exercise voting rights through the depository with respect to the deposited
securities. An unsponsored ADR has no sponsorship by the issuing facility and
additionally, more than one depository institution may be involved in the
issuance of the unsponsored ADR. However, it typically clears through The
Depository Trust Company and therefore, there should be no additional delays in
selling the security or in obtaining dividends. Although not required, the
depository normally requests a letter of non-objection from the issuer. In
addition, the depository is not required to distribute notices of shareholder's
meetings or financial information to the purchaser. The Fund may also purchase
the securities of foreign issuers directly in foreign markets so long as, in
the investment manager's judgment, an established public trading market exists
(that is, there are a sufficient number of shares traded regularly relative to
the number of shares to be purchased by the Fund).

Any investments made by the Fund in foreign securities where delivery takes
place outside the United States will have to be made in compliance with any
applicable United States and foreign currency restrictions and other tax laws
and laws limiting the amount and types of foreign investments. Changes of
governmental administrations, economic or monetary policies in the United
States or abroad, or changed circumstances in dealings

<PAGE>

between nations could result in investment losses for the Fund and could
adversely affect the Fund's operations. The Fund's purchase of securities in
foreign countries will involve currencies of the U.S. and of foreign countries;
consequently, changes in exchange rates, currency convertibility and
repatriation may favorably or adversely affect the Fund. Although current
regulations do not, in the opinion of the Fund's investment manager, limit
seriously the Fund's investment activities, if they were changed in the future
they might restrict the ability of the Fund to make its investments or tend to
impair the liquidity of the Fund's investments.

Securities which are acquired by the Fund outside of the United States and
which are publicly traded in the United States or on a foreign securities
exchange or in a foreign securities market are not considered by the Fund to be
illiquid assets, if (a) the Fund reasonably believes it can readily dispose of
the securities for cash in the U.S. or foreign market or (b) current market
quotations are readily available. The Fund will not acquire the securities of
foreign issuers outside of the United States under circumstances where, at the
time of acquisition, the Fund has reason to believe that it could not resell
the securities in a public trading market. Investors should recognize that
foreign securities are often traded with less frequency and volume, and
therefore may have greater price volatility, than is the case with many U.S.
securities. Notwithstanding the fact that the Fund intends to acquire the
securities of foreign issuers only where there are public trading markets,
investments by the Fund in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Fund's portfolio and
the Fund's ability to meet a large number of shareholders' redemption requests
should there be economic or political turmoil in a country in which the Fund
has a substantial portion of its assets invested or should relations between
the United States and a foreign country deteriorate markedly.

Forward Foreign Currency Exchange Contracts. The Fund may purchase or sell
forward foreign currency exchange contracts. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts. In such
event the Fund's ability to utilize forward contracts in the manner set forth
in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Fund than if it had not entered
into such contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. Dollar equivalent value of, or
rates of return on, the Fund's foreign currency denominated portfolio
securities and the use of such techniques will subject the Fund to certain
risks.

The matching of the increase in value of a forward contract and the decline in
the U.S. Dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the
Fund may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use such contracts
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between
the movement of certain foreign currencies relative to the U.S. Dollar will
continue. Thus, at any time, poor correlation may exist between movements in
the exchange rates of the foreign currencies in which the Fund's assets that
are the subject of such cross-hedges are denominated.

Gold Bullion. As a means of seeking its principal objective of capital
appreciation and when it is felt to be appropriate as a possible hedge against
inflation, the Fund may invest a portion of its assets in gold bullion and may
hold a portion of its cash in foreign currency in the form of gold coins. There
is, of course, no assurance that such investments will provide capital
appreciation as a hedge against inflation. The Fund's ability to invest in gold
bullion is restricted by the diversification requirements which the Fund must
meet in order to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"), as well as the diversification
requirements of the Investment Company Act of 1940, as amended (the "1940
Act"). In addition, the ability of the Fund to make such investments may be
further restricted by the securities laws and regulations in effect from time
to time in the states where the Fund's shares are qualified for sale. The Fund
has not previously invested in gold bullion because of these regulations.
However, at the date of this SAI there do not appear to be any regulations
currently in effect in the states in which the Fund is qualified for sale
prohibiting such purchases. Accordingly, if otherwise consistent with the
Fund's objectives, it may purchase gold bullion.

Fund assets will be invested in gold bullion at such times as the prospects of
such investments are, in

<PAGE>

the opinion of management, attractive in relation to other possible
investments. The basic trading unit for gold bullion is a gold bar weighing
approximately 100 troy ounces with a purity of at least 995/1000, although gold
bullion is also sold in much smaller units. Gold bars and wafers are usually
numbered and bear an indication of purity and the stamp or assay mark of the
refinery or assay office which certifies the bar's purity. Bars of gold bullion
historically have traded primarily in the New York, London, and Zurich gold
markets and in terms of volume, such gold markets have been the major markets
for trading in gold bullion. Prices in the Zurich gold market generally
correspond to the prices in the London gold market. Since the ownership of gold
bullion became legal in the United States on December 31, 1974, U.S. markets
for trading gold bullion have developed. It is anticipated that transactions in
gold will generally be made in such U.S. markets, although such transactions
may be made in foreign markets when it is deemed to be in the best interest of
the Fund. Transactions in gold bullion by the Fund are negotiated with
principal bullion dealers unless, in the investment manager's opinion, more
favorable prices (including the costs and expenses described below) are
otherwise obtainable. Prices at which gold bullion is purchased or sold include
dealer mark-ups or mark-downs, insurance expenses, assay charges and shipping
costs for delivery to a custodian bank. Such costs and expenses may be a
greater or lesser percentage of the price from time to time, depending on
whether the price of gold bullion decreases or increases. Since gold bullion
does not generate any investment income, the only source of return to the Fund
on such an investment will be from any gains realized upon its sale, and
negative return will be realized, of course, to the extent the Fund sells its
gold bullion at a loss.

TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES

Call and Put Options on Securities. The Fund intends to write covered call
options and purchase put and call options which trade on securities exchanges
and in the over-the-counter market. Although the Fund has no current intention
of writing covered put options in the foreseeable future, the Fund reserves the
right to do so.

Writing Call Options. A call option written by the Fund gives the holder the
right to buy the underlying securities from the Fund at a stated exercise
price; a put option written by the Fund gives the holder the right to sell the
underlying security to the Fund at a stated exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security which
is subject to the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash and high grade debt securities in a segregated account with
its custodian. The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates.

The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, since with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount, of course, may, in
the case of a covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security.

The writer of an option that wishes to terminate its obligation may effect a
"losing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.

Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. Also,

<PAGE>

effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.

The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.

Purchasing Call Options. The Fund may purchase call options on securities which
it intends to purchase in order to limit the risk of a substantial increase in
the market price of such security. The Fund may also purchase call options on
securities held in its portfolio and on which it has written call options. A
call option gives the holder the right to buy the underlying securities from
the option writer at a stated exercise price. Prior to its expiration, a call
option may be sold in a closing sale transaction. Profit or loss from such a
sale will depend on whether the amount received is more or less than the
premium paid for the call option plus the related transaction costs.

Writing Put Options. A put option gives the purchaser of the option the right
to sell, and the writer (seller) the obligation to buy, the underlying security
or currency at the exercise price during the option period. The option may be
exercised at any time prior to its expiration date. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.

The Fund would write put options only on a covered basis, which means that the
Fund would maintain in a segregated account cash, U.S. government securities or
other liquid, high-grade debt securities in an amount not less than the
exercise price at all times while the put option is outstanding. (The rules of
the clearing corporation currently require that such assets be deposited in
escrow to secure payment of the exercise price.) The Fund would generally write
covered put options in circumstances where the Adviser wishes to purchase the
underlying security or currency for the Fund's portfolio at a price lower than
the current market price of the security or currency. In such event the Fund
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since
the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk
in such a transaction would be that the market price of the underlying security
or currency would decline below the exercise price less the premiums received.

Purchasing Put Options. The Fund may purchase put options. As the holder of a
put option, the Fund has the right to sell the underlying security or currency
at the exercise price at any time during the option period. The Fund may enter
into closing sale transactions with respect to such options, exercise them or
permit them to expire.

The Fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the Fund as a hedging technique in order to protect
against an anticipated decline in the value of the security or currency. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
or currency at the put exercise price regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency when the Adviser deems it desirable to continue to hold
the security or currency because of tax considerations. The premium paid for
the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security or currency is
eventually sold.

The Fund may also purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security or currency must decline sufficiently

<PAGE>

below the exercise price to cover the premium and transaction costs, unless the
put option is sold in a closing sale transaction.

Loans of Portfolio Securities. The Fund did not loan any securities during the
fiscal year ended July 31, 1994. A limited amount of the Fund's portfolio
securities may be loaned to qualified borrowers who deposit and maintain with
the Fund cash collateral with a value at least equal to the value of the
securities loaned. Consistent with procedures approved by the Board of
Directors and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan. The borrower must
deposit with the Fund's custodian collateral with an initial market value of at
least 102% of the initial market value of the securities loaned, including any
accrued interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. The
lending of securities is a common practice in the securities industry. The Fund
will engage in security loan arrangements with the primary objective of
increasing the Fund's income through investment of the cash collateral in
short-term interest bearing obligations, but will do so only to the extent that
the Fund will not lose the tax treatment available to regulated investment
companies. The Fund will continue to be entitled to all dividends or interest
on any loaned securities. As with any extension of credit, there are risks of
delay in recovery and loss of rights in the collateral should the borrower of
the security fail financially.

Repurchase Agreements. As discussed in the Prospectus, the Fund may invest in
repurchase agreements with commercial banks, brokers or dealers, either for
defensive purposes due to market conditions or to generate income from its
excess cash balances.

The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's
investment manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the Fund, these risks can be
controlled through careful monitoring procedures.

TIMING OF THE FUND'S SECURITIES TRANSACTIONS

Normally, the Fund will purchase securities for investment with a view to
long-term appreciation. However, the Fund may on occasion purchase securities
with the expectation of realizing gains over the short-term. Because the
investment outlook of the types of securities which the Fund may be purchasing
may change as a result of unexpected developments in national or international
securities markets, or in economic, monetary or political relationships, the
Fund will not treat its portfolio turnover as a limiting factor. Changes in
particular portfolio holdings may be made whenever it is considered that a
security no longer has optimum growth potential or has reached its anticipated
level of performance, or that another security appears to have a relatively
greater opportunity for capital appreciation, and will be made without regard
to the length of time a security has been held. However, the differences
between the tax treatment of long-term gains and short-term gains may be
considered in determining the timing of sales of portfolio securities.

The Fund's portfolio turnover rates are set forth in the table entitled "Per
Share Income and Capital Changes" in the Prospectus.

SPECIAL CONSIDERATIONS AS A
RESULT OF THE FUND'S INVESTMENT POLICIES

As is true with respect to virtually all investments, there are risks inherent
in the Fund's policies of investing in securities of companies engaged in
mining, processing or dealing in gold or other precious metals and in gold
bullion. In addition to the general considerations described above, such
investments may involve the following special considerations:

1. Fluctuations in the Price of Gold. The price of gold has recently been
subject to substantial upward and downward price movements over short periods
of time and may be affected by unpredictable international monetary and
political policies, such as currency devaluations or reevaluations, economic
conditions within an individual country, trade imbalances or trade or currency
restrictions between countries and world inflation rates and interest

<PAGE>

rates. The price of gold, in turn, is likely to affect the market prices of
securities of companies mining, processing or dealing in gold and, accordingly,
the value of the Fund's investments in such securities also may be affected.

2. Potential Effect of Concentration of Source of Supply and Control of Sales.
At the current time there are only four major sources of supply of primary gold
production, and the market share of each source cannot be readily ascertained.
One of the largest national producers of gold bullion and platinum is the
Republic of South Africa. Changes in political and economic conditions
affecting South Africa may have a direct impact on its sales of gold. Under
South African law, the only authorized sales agent for gold produced in South
Africa is the Reserve Bank of South Africa which, through its retention
policies, controls the time and place of any sale of South African bullion. The
South African Ministry of Mines determines gold mining policy. South Africa
depends predominantly on gold sales for the foreign exchange necessary to
finance its imports, and its sales policy is necessarily subject to national
and international economic and political developments.

3. Tax and Currency Laws. Changes in the tax or currency laws of the U.S., and
of foreign countries, may inhibit the Fund's ability to pursue or may increase
the cost of pursuing its investment programs. For example, in September 1985,
the government of South Africa reimposed a two-tier currency system. While this
system may be removed within the next couple of years, it continues to
differentiate between currency which may be used in transactions involving
transfers of South African investments by foreign investors (the "financial
rand") and currency used for importing goods and remitting profits and
dividends from an operating enterprise (the "commercial rand"). Since the
reimposition of this two-tier currency system, the volatility of the financial
rand has contributed to fluctuations in the net asset value of the Fund. These
effects may increase if the permissible uses of the financial rand are
expanded.

4. Unpredictable Monetary Policies, Economic and Political Conditions. The
Fund's assets might be less liquid or the change in the value of its assets
might be more volatile (and less related to general price movements in the U.S.
markets) than would be the case with investments in the securities of larger
U.S. companies, particularly because the price of gold and other precious
metals may be affected by unpredictable international monetary policies and
economic and political considerations, governmental controls, conditions of
scarcity, surplus or speculation. In addition, the use of gold or Special
Drawing Rights (which are also used by members of the International Monetary
Fund for international settlements) to settle net deficits and surpluses in
trade and capital movements between nations subjects the supply and demand, and
therefore the price, of gold to a variety of economic factors which normally
would not affect other types of commodities.

5. New and Developing Markets for Private Gold Ownership. Between 1933 and
December 31, 1974, a market did not exist in the United States in which gold
bullion could be purchased by individuals for investment purposes. Since it
became legal to invest in gold, markets have developed in the U.S. Any large
purchases or sales of gold bullion could have an effect on the price of gold
bullion. Recently, several Central Banks have been sellers of gold bullion from
their reserves. Sales by central banks and/or rumors of such sales have had a
negative effect on gold prices.

6. Expertise of the Investment Manager. The successful management of the Fund's
portfolio may be more dependent upon the skills and expertise of its investment
manager than is the case for most mutual funds because of the need to evaluate
the factors identified above. Moreover, in some countries, disclosures
concerning an issuer's financial condition and results and other matters may be
subject to less stringent regulatory provisions, or may be presented on a less
uniform basis than is the case for issuers subject to U.S. securities laws.
Issuers and securities exchanges in some countries may be subject to less
stringent governmental regulations than is the case for U.S. companies.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
Fund's outstanding shares. In order to change any of these restrictions, the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting
of shareholders if the holders of more than 50% of the Fund's voting securities
are represented at that meeting or (ii) more than 50% of the Fund's outstanding
voting securities must vote to make the change. The Fund does not:

1. Purchase the stock or securities of any issuer other than those of the
United States of America or its instrumentalities, if at the time of the invest
ment the effect thereof shall be to cause more

<PAGE>

than 5% of the value of its assets to be invested at such time in the
securities of such issuer;

2. As to 75% of its total assets, purchase stock or securities of an issuer,
other than the United States of America or its instrumentalities, if the effect
thereof shall be to cause more than 10% of the voting securities of such issuer
to be held by the Registrant;

3. Borrow money in an amount in excess of 5% of the value of its total assets,
and then only from banks for temporary or emergency purposes, and not for
direct investment in securities;

4. Lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of a type customarily purchased by
institutional investors, or through loans of its portfolio securities, or to
the extent the entry into a repurchase agreement may be deemed a loan;

5. Underwrite the securities of other issuers or invest more than 10% of its
assets in illiquid securities, including certain securities with legal or
contractual restrictions on resale;

6. Invest in securities for the purpose of exercising management or control of
the issuer;

7. Maintain a margin account with a securities dealer or effect short sales;

8. Invest in commodities or commodity contracts, except that it may invest in
gold bullion and foreign currency in the form of gold coins;

9. Invest directly in real estate (although it may invest in real estate
investment trusts) or in the securities of other open-end investment companies,
except that securities of another open-end investment company may be acquired
pursuant to a plan of reorganization, merger, consolidation or acquisition and
except to the extent the Fund invests its uninvested daily cash balances in
shares of Franklin Money Fund and other money market funds in the Franklin
Group of Funds provided i) its purchases and redemptions of such money market
fund shares may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees, nor to any
charge related to the expenses of distributing the Fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and iii)
provided aggregate investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund;

10. Invest in assessable securities or securities involving unlimited liability
on the part of the Fund; or

11. Purchase or retain in its portfolio any security if any officer, director
or security holder of the issuer is at the same time an officer, director or
employee of the Fund or of its investment manager and such person owns
beneficially more than 1/2 of 1% of the securities and if all such persons
owning more than 1/2 of 1% own more than 5% of the outstanding securities of
the issuer.

In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the Fund's shareholders) not to
pledge, mortgage or hypothecate the Fund's assets as security for loans, nor to
engage in joint or joint and several trading accounts in securities, except
that an order to purchase or sell may be combined with orders from other
persons to obtain lower brokerage commissions. The Fund may not invest in real
estate limited partnerships or in interests (other than publicly traded equity
securities) in oil, gas, or other mineral leases, exploration or development
(investments in marketable securities issued by real estate investment trusts
are not subject to this restriction). The Fund's investments in warrants, if
any, other than those acquired by the Fund as a part of a unit, valued at the
lower of cost or market, will not exceed 5% of the value of the Fund's net
assets, including not more than 2% which are not listed on the New York or
American Stock Exchange.

OFFICERS AND DIRECTORS

The Board of Directors has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities.
The directors, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested persons" of the
Fund, as defined in the 1940 Act, are indicated by an asterisk (*).

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Director President and Director, Abbott Corporation (an investment
1045 Sansome St. company); Director, Mother Lode Gold Mines Consolidated; and
San Francisco, CA 94111 director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.

Harris J. Ashton Director President, Chief Executive Officer and Chairman of the Board
General Host Corporation of General Host Corporation (nursery and craft centers);
Metro Center, 1 Station Place Director of RBC Holdings, Inc. (a bank holding company) and
Stamford, CT 06904-2045 Bar-S Foods; director of certain of the investment companies
in the Templeton Group of Funds; and director, trustee or
managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.

*Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin
777 Mariners Island Blvd. and Director Resources, Inc.; Executive Vice President, Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc. and Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; Director,
Templeton Worldwide, Inc.; director of certain of the
investment companies in the Templeton Group of Funds; and
officer and/or director of other subsidiaries of Franklin
Resources, Inc. and officer of all the investment companies
in the Franklin Group of Funds.

S. Joseph Fortunato Director Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris County director of certain of the investment companies in the
P. O. Box 1945 Templeton Group of Funds; and director, trustee or managing
Morristown, NJ 07962-1945 general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.

David W. Garbellano Director Private Investor; Assistant Secretary/Treasurer and Director,
111 New Montgomery St., #402 Berkeley Science Corporation (a venture capital company); and
San Francisco, CA 94105 director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.

*Charles B. Johnson Chairman President and Director, Franklin Resources, Inc.; Chairman of
777 Mariners Island Blvd. of the Board the Board and Director, Franklin/Templeton Distributors,
San Mateo, CA 94404 and Director Inc.; and Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and General Host
Corporation; Director, Templeton Worldwide, Inc., Templeton,
Galbraith & Hansberger Ltd., Templeton Global Investors,
Inc.; director of certain of the investment companies in the
Templeton Group of Funds; and officer and/or director,
trustee or managing general partner, as the case may be, of
most other subsidiaries of Franklin Resources, Inc. and of
most of the investment companies in the Franklin Group of
Funds.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
*Rupert H. Johnson, Jr. Vice President Executive Vice President and Director, Franklin Resources,
777 Mariners Island Blvd. and Director Inc.; President and Director, Franklin Advisers, Inc.; Senior
San Mateo, CA 94404 Vice President and Director, Franklin/Templeton Distributors,
Inc.; Director, Franklin/Templeton Investor Services, Inc.;
Director, Templeton Worldwide, Inc.; director of certain of
the investment companies in the Templeton Group of Funds; and
officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of most of the investment companies in
the Franklin Group of Funds.

Frank W. T. LaHaye Director General Partner, Peregrine Associates and Miller & LaHaye,
20833 Stevens Creek Blvd. which are General Partners of Peregrine Ventures and
Suite 102 Peregrine Ventures II (venture capital firms); Chairman of
Cupertino, CA 95014 the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or
trustee, as the case may be, of most of the investment
companies in the Franklin Group of Funds.

*R. Martin Wiskemann President and Senior Vice President, Portfolio Manager and Director,
777 Mariners Island Blvd. Director Franklin Advisers, Inc.; Senior Vice President, Franklin
San Mateo, CA 94404 Management, Inc.; Vice President, Treasurer and Director, ILA
Financial Services, Inc. and Arizona Life Insurance Company
of America; and officer and/or director, as the case may be,
of many of the investment companies in the Franklin Group of
Funds.

Edward V. McVey Vice President Senior Vice President/National Sales Manager,
777 Mariners Island Blvd. Franklin/Templeton Distributors, Inc.; and officer of many of
San Mateo, CA 94404 the investment companies in the Franklin Group of Funds.

Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources, Inc., Franklin
777 Mariners Island Blvd. and Treasurer Advisers, Inc. and Franklin/Templeton Distributors, Inc.;
San Mateo, CA 94404 officer or director of other subsidiaries of Franklin
Resources, Inc. and officer and/or managing general partner
of all the investment companies in the Franklin Group of
Funds.

Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin Resources, Inc.; and
777 Mariners Island Blvd. and Secretary Franklin/Templeton Distributors, Inc. and Franklin Advisers,
San Mateo, CA 94404 Inc.; and officer of all the investment companies in the
Franklin Group of Funds.
</TABLE>

As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds(R). Directors not affiliated
with the investment manager are currently paid fees of $150 per month plus $150
per meeting attended and are reimbursed for expenses incurred in connection
with attending such meetings. During the fiscal year ended July 31, 1994, fees
and expenses totaling $18,752 were paid to directors of the Fund who are not
affiliated with the investment manager. No officer or director received any
other compensation directly from the Fund. As of September 6, 1994,

<PAGE>

the directors and officers, as a group, owned of record and beneficially
approximately 9,261.075 shares or less than 1% of the total outstanding shares
of the Fund. Certain officers or directors who are shareholders of Franklin
Resources, Inc. may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers.

From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Fund, no other person holds
beneficially or of record more than 5% of the Fund's outstanding common stock.

INVESTMENT ADVISORY AND OTHER SERVICES

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $117
billion in assets for over 3.7 million shareholders. The preceding table
indicates those officers and directors who are also affiliated persons of
Distributors and Advisers.

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers through whom
the Fund's portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of the Fund's Board of Directors to whom
the Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, furnishes the Fund with office space and office
furnishings, facilities and equipment required for managing the business
affairs of the Fund; maintains all internal bookkeeping, clerical, secretarial
and administrative personnel and services; and provides certain telephone and
other mechanical services. The Manager is covered by fidelity insurance on its
officers, directors, and employees for the protection of the Fund. The Fund
bears all of its expenses not assumed by the Manager. See the Statement of
Operations in the financial statements at the end of this SAI for additional
details of these expenses.

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for
the first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2
of 1% per year) of net assets of the Fund in excess of $100 million up to $250
million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of
the Fund in excess of $250 million. The management agreement specifies that the
management fee will be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by the Fund as prescribed
by any state in which the Fund's shares are offered for sale. The most
stringent current limit requires the Manager to reduce or eliminate its fee to
the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 2 1/2% of the first $30 million
of average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 1 1/2% of average net assets of the Fund in excess of
$100 million. Expense reductions have not been necessary based on state
requirements.

The Manager waived its management fees payable during the period October 1,
1991, through October 31, 1992, in order to reimburse the Fund for a loss
incurred in connection with the inadvertent purchase of certain debt securities
in excess of limits set forth in the Fund's investment restrictions. For the
fiscal year ended July 31, 1992, the management fees the Fund was contractually
obligated to pay the Manager were $1,419,317 and the management fees actually
charged to the Fund were $230,184. For the fiscal year ended July 31, 1993, the
management fees the Fund was contractually obligated to pay the Manager were
$1,445,968 and the management fees actually charged to the Fund were
$1,124,060. For the fiscal year ended July 31, 1994 the Fund paid management
fees of $1,960,100.

The management agreement is in effect until April 30, 1995. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Fund's Board of
Directors or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a ma-

<PAGE>

jority vote of the Fund's directors who are not parties to the management
agreement or interested persons of any such party (other than as directors
of the Fund), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Fund
or by the Manager on 30 days' written notice and will automatically terminate
in the event of its assignment, as defined in the 1940 Act.

Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.

Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. Wilmington Trust Company, Rodney Square North, Wilmington, Delaware
19890, acts as custodian with respect to accepting, holding, storing,
transferring and delivering precious metals owned by the Fund. The custodians
do not participate in decisions relating to the purchase and sale of portfolio
securities.

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended July 31, 1994, their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report and this SAI.

THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS

Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Fund's Board of Directors may give.

When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry
and information available to them concerning the level of commissions being
paid by other institutional investors of comparable size. The Manager will
ordinarily place orders for the purchase and sale of over-the-counter
securities on a principal rather than agency basis with a principal market
maker unless, in the opinion of the Manager, a better price and execution can
otherwise be obtained. Purchases of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask price. As
a general rule, the Fund does not purchase bonds in underwritings where it is
not given any choice, or only limited choice, in the designation of dealers to
receive the commission. The Fund seeks to obtain prompt execution of orders at
the most favorable net price.

The amount of commission is not the only relevant factor to be considered in
the selection of a broker to execute a trade. If it is felt to be in the Fund's
best interests, the Manager may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Fund will
have to pay a higher commission than would be the case if no weight were given
to the broker's furnishing of these services. This will be done only if, in the
opinion of the Manager, the amount of any additional commission is reasonable
in relation to the value of the services. Higher commissions will be paid only
when the brokerage and research services received are bona fide and produce a
direct benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund, or when it is otherwise in the best interest of
the Fund to do so, whether or not such data may also be useful to the Manager
in advising other clients.

When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in
light of such services, and through brokers who supply research, statistical

<PAGE>

and other data to the Fund and Manager in such amount of total brokerage as may
reasonably be required.

It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. Provided that
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered as a factor in the selection of brokers
to execute the Fund's portfolio transactions.

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers
under the management agreement will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection therewith.

If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the Manager are considered at or
about the same time, transactions in such securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by the Manager, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. It is recognized that in some
cases this procedure could possibly have a detrimental effect on the price or
volume of the security so far as the Fund is concerned. In other cases it is
possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the Fund.

During the fiscal years ended July 31, 1992, 1993, and 1994, the Fund paid
total brokerage commissions of $28,254, $108,212, and $93,141, respectively. As
of July 31, 1994, the Fund did not own securities of its regular
broker-dealers.

ADDITIONAL INFORMATION
REGARDING FUND SHARES

All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.

In connection with exchanges (see Prospectus "Exchange Privilege"), it should
be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the funds into which the Fund shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an
exchange for shares of any of the investment companies will be effected at the
close of business on the day the request for exchange is received in proper
form at the net asset value then effective.

Dividend checks which are returned to the Fund marked "unable to forward" by
the postal service will be deemed to be a request by the shareholder to change
the dividend option and the proceeds will be reinvested in additional shares at
net asset value until new instructions are received.

The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their location services.

Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service
fees may be paid to Distributors, or an affiliate of Distributors to help
defray expenses of maintaining a service office in Taiwan, including expenses
related to local literature fulfillment and communication facilities.

<PAGE>

Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:

<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE IN U.S. DOLLARS CHARGE
- -------------------------------- ------
<S> <C>
Up to $100,000................. 3%
$100,000 to $1,000,000......... 2%
Over $1,000,000................ 1%
</TABLE>

PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS

Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
the Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the Fund. Such reference,
however, is for convenience only and does not indicate a legal conclusion of
capacity.

Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion
and any loss to the customer resulting from failure to do so must be settled
between the customer and the securities dealer.

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with respect to these investors. If certain investments at net asset
value are made through a dealer who has executed a dealer or similar agreement
with Distributors, Distributors or its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested (1% for certain 401(k) or similar category of investor as
stated in the Prospectus), paid pro rata on a quarterly basis on average
quarterly balances for a period of one year.

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission. In the case of
requests for redemption in excess of such amounts, the directors reserve the
right to make payments in whole or in part in securities or other assets of the
Fund from which the shareholder is redeeming, in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should the
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind;
however, should it happen, shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling such securities.

REDEMPTIONS BY THE FUND

Due to the relatively high cost of handling small investments, the Fund
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption
of shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value
of $50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.

CALCULATION OF NET ASSET VALUE

As noted in the Prospectus, the Fund generally calculates net asset value as of
1:00 p.m. Pacific time each day that the Exchange is open for trading. As of
the date of this SAI, the Fund is informed that the Exchange observes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

<PAGE>

REINVESTMENT DATE

The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. This
date will vary from month to month, based on operational considerations, and is
not necessarily the same date as the record date or the payable date for cash
dividends.

SPECIAL SERVICES

The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Fund. The cost of these services is not borne by the Fund.

Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.

ADDITIONAL INFORMATION REGARDING TAXATION

As stated in the Prospectus, the Fund has elected and qualified to be treated
as a regulated investment company under Subchapter M of the Code. The Directors
reserve the right not to maintain the qualification of the Fund as a regulated
investment company if they determine such course of action to be beneficial to
the shareholders. In such case, the Fund will be subject to federal and
possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Fund's
available earnings and profits.

Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.

Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by a
Fund as a dividend will not qualify for the dividends-received deduction.

Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment
in Fund shares. The entire dividend, including the portion which is treated as
a deduction, is includable in the tax base on which the alternative minimum tax
is computed and may also result in a reduction in the shareholder's tax basis
in its Fund shares, under certain circumstances, if the shares have been held
for less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.

The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the twelve month period ending October 31
of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to shareholders by December 31 of each year
in order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to the shareholder until the
following January, will be treated for tax purposes as if paid by the Fund and
received by the shareholder on December 31 of the calendar year in which they
are declared. The Fund intends as a matter of policy to declare such dividends,
if any, in December and to pay these

<PAGE>

dividends in December or January to avoid the imposition of this tax, but does
not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.

Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in his/her shares and the amount received, subject to the rules described
below. If such shares are a capital asset in the hands of the shareholder, gain
or loss will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.

All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares purchased.

All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Group (defined under "How to
Buy Shares of the Fund") and a sales charge which would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment.

When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, resulting in possible deferral of
losses, adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles, i.e. straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position, which may reduce or
eliminate the operation of these straddle rules.

As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than
three months ("short-short income").

This requirement may limit the Fund's ability to engage in options because
these transactions are often consummated in less than three months, may require
the sale of portfolio securities held less than three months and may, as in the
case of short sales of portfolio securities, reduce the holding periods of
certain securities within the Fund, resulting in additional short-short income
for the Fund.

The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.

Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, or foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be
treated as ordinary income and losses rather than capital gains and losses and
may affect the amount and timing of the Fund's income or loss from such
transactions and, in turn, its distributions to shareholders.

In order for the Fund to qualify as a regulated investment company, at least
90% of the Fund's annual gross income must consist of dividends, interest and
other types of qualifying income and no more than 30% of its annual gross
income may be derived from the sale or other disposition of securities or
certain other investments held for less than three months. Foreign exchange
gains derived by a Fund with respect to the Fund's business of investing in
stock or securities or options or futures with respect to such stock or
securities is qualifying income for purposes of this 90% limitation.

If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to United States
federal income taxation on a portion of any "excess distribution" it receives
from the PFIC or any gain it derives from the disposition of such shares, even
if such income is

<PAGE>

distributed as a taxable dividend by the Fund to its United States
shareholders. The Fund may be also subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any tax
paid by a Fund as a result of its ownership of shares in a PFIC will not give
rise to a deduction or credit to the Fund or to any shareholder. A PFIC means
any foreign corporation if, for the taxable year involved, either (i) it
derives at least 75 percent of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce "passive
income."

Legislation introduced in the U.S. House of Representatives would unify, and,
in some cases, modify the anti-deferral rules contained in various provisions
of the Code, including the provisions dealing with PFICs, related to the
taxation of U.S. shareholders of foreign corporations. In the case of passive
foreign company, as defined in the proposed legislation ("PFC"), having
"marketable stock," the proposed legislation would require U.S. shareholders,
such as the Fund, owning less than 25% of a PFC that is not U.S.-controlled to
mark to market PFC stock annually, unless the shareholders elected to include
in income currently their proportionate shares of the PFC's income and gain.
Otherwise, U.S. shareholders would be treated substantially the same as under
current law. Special rules applicable to mutual funds would classify as
"marketable stock" all stock in PFCs held by a Fund; however, the Fund would
not be liable for tax on income from PFCs that is distributed to its
shareholders. It is unclear if or when the proposed legislation will become law
and if enacted what form it will take. On April 1, 1992, the U.S. Internal
Revenue Service released proposed regulations regarding a mark to market
election for regulated investment companies that would have effects similar to
the proposed legislation. These regulations would be effective for taxable
years ending after promulgation of the regulations as final regulations. The
IRS subsequently issued a notice indicating that final regulations will provide
that regulated investment companies may elect the mark to market election for
tax years ending after March 31, 1992 and before April 1, 1993. Whether and to
what extent the notice will apply to taxable years of the Fund is unclear.

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.

The underwriting agreement will continue in effect for successive annual
periods provided that its continuance is specifically approved at least
annually by a vote of the Fund's Board of Directors, or by a vote of the
holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Fund's directors who are not parties to
the underwriting agreement or interested persons of any such party (other than
as directors of the Fund), cast in person at a meeting called for that purpose.
The underwriting agreement terminates automatically in the event of its
assignment and may be terminated by either party on 90 days' written notice.

Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission on the reinvestment of income dividends to the securities dealer of
record, if any, on an account. Starting with any income dividends paid after
April 30, 1994, such reinvestment will be at net asset value.

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended July 31, 1992, 1993, and 1994 were
$1,335,866, $2,579,590, and $3,229,173 respectively. After allowances to
dealers, Distributors retained $118,371, $72,573, and $56,232 during the fiscal
years ended July 31, 1992, 1993, and 1994 respectively. Distributors may be
entitled to reimbursement under the Distribution Plan of the Fund as discussed
below. Except as noted, Distributors received no other compensation from the
Fund for acting as underwriter.

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act (the

<PAGE>

"Plan") whereby the Fund may pay up to a maximum of 0.25% per annum of its
average daily net assets for expenses incurred in the promotion and
distribution of its shares.

In implementing the Plan, the Board has determined that the annual fees payable
thereunder will be equal to the sum of: (i) the amount obtained by multiplying
0.25% by the average daily net assets represented by shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average
daily net assets represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("Old Assets"). Such fees will be paid to the
current securities dealer of record on the shareholder's account. In addition,
until such time as the maximum payment of 0.25% is reached on a yearly basis,
up to an additional 0.05% will be paid to Distributors under the Plan. The
payments to be made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in accordance with the Plan,
such as advertising.

The fee is a Fund expense so that all shareholders, regardless of when they
purchased their shares, will bear expenses under the Plan at the same rate.
That rate initially will be at least 0.20% (0.05% plus 0.15%) of such average
daily net assets and, as Fund shares are sold on or after the Effective Date,
will increase over time. Thus, as the proportion of Fund shares purchased on or
after the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.25% of average daily net assets). While this is the currently
anticipated method for calculating fees payable under the Plan, the Plan
permits the Fund's directors to allow the Fund to pay a full 0.25% on all
assets at any time. The approval of the Fund's Board of Directors would be
required to change the method of calculating the payments to be made under the
Plan.

Pursuant to the Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred
in the distribution and promotion of the Fund's shares, including, but not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.

In addition to the payments to which Distributors or others are entitled under
the Plan, the Plan also provides that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such payments shall
be deemed to have been made pursuant to the Plan.

In no event shall the aggregate asset-based sales charges which include
payments made under the Plan, plus any other payments deemed to be made
pursuant to the Plan, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.,
Article III, Section 26(d)4.

The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.

To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the Plan as a result of applicable
federal law prohibiting certain banks from engaging in the distribution of
mutual fund shares. Such banking institutions, however, are permitted to
receive fees under the Plan for administrative servicing or for agency
transactions. If a bank were prohibited from providing such services, its
customers who are shareholders would be permitted to remain shareholders of the
Fund, and alternate means for continuing the servicing of such shareholders
would be sought. In such an event, changes in the services provided might occur
and such shareholders might no longer be able to avail themselves of any
automatic investment or other services then being provided by the bank. It is
not expected that shareholders would suffer any adverse financial consequences
as a result of any of these changes. Securities laws of states in which the
Fund's shares are offered for sale may differ from the interpretations of
federal law expressed herein, and banks and financial institutions selling
shares of the Fund may be required to register as dealers pursuant to state
law.

<PAGE>

The Plan has been approved by public shareholders, and by the directors of the
Fund, including those directors who are not interested persons, as defined in
the 1940 Act. The Plan is effective through April 30, 1995 and renewable
annually by a vote of the Fund's Board of Directors, including a majority vote
of the directors who are non-interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such directors be done by the non-interested
directors. The Plan and any related agreement may be terminated at any time,
without any penalty, by vote of a majority of the non-interested directors on
not more than 60 days' written notice, by Distributors on not more than 60
days' written notice, by any act that constitutes an assignment of the
Management Agreement with the Manager, or by vote of a majority of the Fund's
outstanding shares. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.

The Plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the Plan or
any related agreements shall be approved by a vote of the non-interested
directors, cast in person at a meeting called for the purpose of voting on any
such amendment.

Distributors is required to report in writing to the Board of Directors at
least quarterly on the amounts and purpose of any payment made under the Plan
and any related agreements, as well as to furnish the Board of Directors with
such other information as may reasonably be requested in order to enable the
Board of Directors to make an informed determination of whether the Plan should
be continued. For the fiscal year ended July 31, 1994, the Fund paid $211,176
to securities dealers under the Plan.

GENERAL INFORMATION

PERFORMANCE

As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.

Performance quotations by investment companies are subject to rules adopted by
the Securities and Exchange Commission ("SEC"). These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual compounded total return quotations used by the Fund are based on
the standardized methods of computing performance mandated by the SEC. An
explanation of those methods used by the Fund to compute or express performance
follows.

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year period and the deduction
of all applicable charges and fees. If a change is made on the sales charge
structure, historical performance information will be restated to reflect the
maximum sales charge in effect currently.

In considering the quotations of total return by the Fund, investors should
remember that the maximum sales charge reflected in each quotation is a one
time fee (charged on all direct purchases) which will have its greatest impact
during the early stages of an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge the longer an
investor retains the investment in the Fund. The average annual compounded
rates of return for the Fund for the indicated periods ended on the date of the
financial statements included herein were -7.88%, 6.03%, and 8.34%,
respectively.

These figures were calculated according to the SEC formula:

P(1+T)n= ERV

where:

P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-,
five-, or ten-year periods (or fractional portion thereof)

<PAGE>

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one, five-, and ten-year periods. The
total rates of return for the one-, five-, and ten-year periods ended on the
date of the financial statements included herein were -7.88%, 34.04% and
122.69%, respectively.

VOLATILITY

Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index.(R) A beta of more than
1.00 indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average over a specified period of
time. The premise is that greater volatility connotes greater risk undertaken
in achieving performance.

OTHER PERFORMANCE QUOTATIONS

With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote, total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of net
asset value for the public offering price.

Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.

Regardless of the method used, past performance is not necessarily indicative
of future results, but is an indication of the return to shareholders only for
the limited historical period used.

The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.

COMPARISONS

To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Such comparisons may include, but are not limited to, the following examples:

a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.

b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.

c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.

d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available. Comparisons
of performance assume reinvestment of dividends.

e) Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.

f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.

g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.

<PAGE>

h) Financial publications: The Wall Street Journal and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.

i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.

j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.

k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.

l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers, and Bloomberg L.P.

In addition to the indices listed above, the following gold bullion and gold
mining stock indices may be appropriate:

a) London Gold Prices - based on afternoon price fixings of five major gold
bullion dealers.

b) Financial Times Gold Mining Shares Index - represents the return on the
market value of South African gold mining stocks.

c) Toronto Gold Index - represents the return on the market value of gold
mining stocks listed on the Toronto Exchange.

d) Australian Gold Index - represents the return on the market value of gold
mining stocks listed on the Australian Exchange.

e) Philadelphia Gold and Silver Index - represents the return on the market
value of gold and silver mining stocks listed on the Philadelphia exchange.

From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.

Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit or other investments. Investors should be
aware, however, that an investment in the Fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a
certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Fund's fixed-income investments, as well
as the value of its shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Fund's shares can be expected to increase.
Certificates of deposit are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.

In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
figures. In addition there can be no assurance that the Fund will continue this
performance as compared to such other averages.

Advertisements may discuss the purchase of shares of the Fund in connection
with a strategy to combat the effects of inflation. The discussion may note the
fact that, over time, inflation may erode purchasing power. Even if inflation
averages only 4.5% a year, the value of the dollar today would be reduced to
just 42 cents in 20 years. Gold historically has acted as a hedge against
inflation.

OTHER FEATURES AND BENEFITS

The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
costs and/or other long-term goals. The Franklin College Costs Planner may
assist an investor in determining how much money must be invested on a monthly
basis in order to have a projected amount available in the future to fund a
child's college education. (Projected college cost estimates are based upon
current costs published by the College Board.) The Franklin Retirement Planning
Guide leads an investor through the steps to start a retirement savings
program. Of course, an investment in the Fund cannot guarantee that such goals
will be met.

The Franklin Gold Fund is a member of the Franklin/Templeton Group, one of the
largest mutual fund organizations in the United States, and may be considered
in a program for diversification of assets. Founded in 1947, Franklin, one of
the

<PAGE>

oldest mutual fund organizations, has managed mutual funds for over 45 years
and now services more than 2.4 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing Together, the Franklin/Templeton Group has over $117
billion in assets under management for more than 3.7 million shareholder
accounts and offers 111 U.S.-based mutual funds. The Fund may identify itself
by its NASDAQ or CUSIP number.

The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was
also ranked number one. Franklin has been ranked number one in service quality
by Dalbar for five of the past six years.

OWNERSHIP AND AUTHORITY DISPUTES

In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the Internal Revenue Service in response
to a Notice of Levy.

<PAGE>

FRANKLIN GOLD FUND

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
of Franklin Gold Fund:

We have audited the accompanying statement of assets and liabilities of
Franklin Gold Fund, including the statement of investments in securities and
net assets, as of July 31, 1994, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights included under
the caption "Financial Highlights" for the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments and cash owned
as of July 31, 1994 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Gold Fund as of July 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for the periods indicated
thereon, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California
August 26, 1994

<PAGE>

FRANKLIN GOLD FUND

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JULY 31, 1994

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS 86.1%
GOLD & DIVERSIFIED RESOURCES 12.3%
356,824 Freeport-McMoRan Copper & Gold, Inc. ................. $ 8,251,555
95,000 Freeport-McMoRan, Inc. ............................... 1,602,350
460,401 RTZ Corp., Plc. ...................................... 6,123,203
295,100 Santa Fe Pacific Corp. ............................... 6,086,438
705,100 Teck Corp., Class B .................................. 11,405,467
909,375 Western Mining Holdings Corp., Ltd. .................. 4,840,248
611,225 Western Mining Holdings Corp., Ltd., ADR ............. 13,141,337
-----------
51,450,598
-----------
LONG LIFE GOLD MINES 17.5%
457,500 a,bAshanti Goldfields, ADS .............................. 9,121,406
500,000 Driefontein Consolidated Mines, Ltd., ADR ............ 7,187,500
905,000 Hemlo Gold Mines, Inc. ............................... 8,710,625
730,000 Kloof Gold Mining Co., Ltd., ADR ..................... 9,170,625
255,000 Newmont Gold Co. ..................................... 9,913,125
341,604 Newmont Mining Corp. ................................. 13,493,358
68,000 aSanta Fe Pacific Gold Corp. .......................... 977,500
133,000 Southvaal Holdings, Ltd., ADR ........................ 3,836,917
975,000 Vaal Reefs Exploration & Mining Co., Ltd., ADR ....... 8,409,375
58,000 Western Deep Levels, Ltd., ADR ....................... 2,414,250
-----------
73,234,681
-----------
MEDIUM LIFE GOLD MINES 38.2%
370,000 aAmax Gold, Inc. ...................................... 2,451,250
2,260,000 American Barrick Resources Corp. ..................... 50,567,500
390,000 Battle Mountain Gold Co. ............................. 4,046,250
3,600,000 aCentral Norseman Gold Corp., N.L., ADR ............... 2,234,520
890,000 Deelkraal Gold Mining Co., Ltd., ADR ................. 1,389,112
497,500 East Rand Gold & Uranium Co., Ltd., ADR .............. 1,231,711
840,700 Echo Bay Mines, Ltd. ................................. 9,773,137
1,016,866 aEmperor Mines, Ltd., ADR ............................. 2,028,851
207,000 FMC Gold Co. ......................................... 1,086,750
558,401 Free State Consolidated Gold Mines, Ltd., ADR ........ 7,512,241
150,000 aGranges, Inc. ........................................ 318,750
904,900 Hartebeestfontein Gold Mining Co., Ltd., ADR ......... 4,334,652
881,117 Homestake Mining Co. ................................. 16,520,944
405,030 LAC Minerals, Ltd. ................................... 4,202,186
865,050 Newcrest Mining, Ltd. ................................ 3,945,649
717,000 aNiugini Mining, Ltd., ADR ............................ 2,887,574
355,000 Pegasus Gold, Inc. ................................... 4,925,625
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN GOLD FUND

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JULY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
MEDIUM LIFE GOLD MINES (CONT.)
938,820 Placer Dome, Inc. .................................... $ 19,480,514
1,150,000 Placer Pacific, Ltd. ................................. 2,932,979
934,100 Plutonic Resources, Ltd. ............................. 4,419,422
1,309,450 Poseidon Gold, Ltd. .................................. 3,271,883
605,000 Randfontein Estates Gold Mining Co., Ltd., ADR ....... 6,414,876
489,800 aTVX Gold, Inc. ....................................... 2,965,535
125,500 Unisel Gold Mines, Ltd., ADR ......................... 263,425
51,000 Winkelhaak Mines, Ltd., ADR .......................... 570,950
------------
159,776,286
------------
MINING FINANCE COMPANIES 8.8%
325,000 Anglo American Gold Investment Co., Ltd., ADR ........ 3,087,500
1,175,000 DeBeers Consolidated Mines, Ltd., ADR ................ 27,906,250
222,100 Gold Fields of South Africa, Ltd., ADR ............... 6,024,462
------------
37,018,212
------------
OTHERS
9,500 aMcMoRan Oil & Gas Co. ................................ 36,812
------------
PLATINUM 8.9%
825,000 Impala Platinum Holdings, Ltd., ADR .................. 18,560,768
845,000 Rustenburg Platinum Holdings, Ltd., ADR .............. 18,919,803
------------
37,480,571
------------
STRATEGIC METALS .4%
99,100 Brush Wellman, Inc. .................................. 1,536,050
------------
TOTAL COMMON STOCKS (COST $270,608,373) .............. 360,533,210
------------
CONVERTIBLE PREFERRED STOCKS 3.2%
10,900 Battle Mountain Gold Co., $3.25 cvt. pfd. ............ 686,700
146,400 Echo Bay Finance Corp., $1.75 cum. cvt. pfd.,
Series A............................................. 5,526,600
87,400 Freeport-McMoRan Copper & Gold, Inc., pfd., Series B . 3,211,950
113,000 Freeport-McMoRan Copper & Gold, Inc., pfd., Series C . 4,138,625
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $11,937,529). 13,563,875
------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN GOLD FUND

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JULY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE DEBENTURES 1.2%
$ 2,100,000 FMC Corp., cvt. deb., 6.75%, 01/16/05 ................ $ 1,811,250
1,250,000 Freeport-McMoRan, Inc., cvt. disc. deb., 6.55%,
01/15/01............................................. 1,115,625
2,470,000 Teck Corp., cvt. sub. deb., 3.75%, 07/15/06 .......... 2,142,725
------------
TOTAL CONVERTIBLE DEBENTURES (COST $4,820,422) ..... 5,069,600
------------
TOTAL COMMON STOCKS, CONVERTIBLE PREFERRED STOCKS
AND CONVERTIBLE DEBENTURES (COST $287,366,324) .... 379,166,685
------------
cSHORT TERM INVESTMENTS 9.6%
BANKERS' ACCEPTANCES 1.7%
7,150,000 Mitsubishi Bank, Ltd., New York Branch,
4.49% - 4.52%, 08/26/94 - 09/14/94
(COST $7,118,781).................................... 7,118,781
------------
COMMERCIAL PAPER 4.5%
4,000,000 American Express Credit Corp., 4.381%, 08/15/94 ...... 4,000,000
5,000,000 General Electric Credit Corp., 4.50%, 09/23/94 ....... 4,966,876
5,000,000 Westpac Bank Corp., 4.38%, 08/22/94 .................. 4,987,225
5,000,000 Westpac Capital Corp., 4.50%, 09/19/94 ............... 4,969,375
------------
TOTAL COMMERCIAL PAPER (COST $18,923,476) ...... 18,923,476
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $313,408,581) ........................... 405,208,942
------------
dRECEIVABLES FROM REPURCHASE AGREEMENTS 3.4%

14,662,633 eJoint Repurchase Agreement, 4.218%, 08/01/94
(Maturity Value $14,083,056) (COST $14,078,108)
Collateral: U.S. Treasury Bills, 12/08/94 -
07/27/95
U.S. Treasury Notes, 3.875% - 8.875%,
03/31/95 - 03/31/99 .................. 14,078,108
------------
TOTAL INVESTMENTS (COST $327,486,689)
100.1% .................................. 419,287,050
LIABILITIES IN EXCESS OF OTHER ASSETS,
NET (.1)% .............................. (588,838)
------------
NET ASSETS 100.0% ....................... $418,698,212
============

At July 31, 1994, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $327,512,308 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ..................................... $124,385,159

Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value ................................... (32,610,417)
------------
Net unrealized appreciation ........................ $ 91,774,742
============
</TABLE>

aNon-income producing.

bSee Note 6 regarding Rule 144A securities.

cCertain short-term securities are traded on a discount basis; the rates shown
are the discount rates at the time of purchase by the Fund. Other securities
bear interest at the rates shown, payable at fixed dates or upon maturity.

dFace amount for repurchase agreements is for the underlying collateral.

eSee Note 1(f) regarding Joint Repurchase Agreement.

The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN GOLD FUND

FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1994

<TABLE>
<S> <C>
Assets:
Investment in securities, at value
(identified cost $313,408,581) $405,208,942
Receivables from repurchase
agreements, at value and cost 14,078,108
Receivables:
Dividends and interest 1,066,495
Capital shares sold 1,283,368
------------
Total assets 421,636,913
------------

Liabilities:
Payables:
Capital shares repurchased 2,465,271
Management fees 178,376
Distribution fees 211,176
Shareholder servicing costs 29,220
Accrued expenses and other liabilities 54,658
------------
Total liabilities 2,938,701
------------

Net assets, at value $418,698,212
============
Net assets consist of:
Undistributed net investment income $ 645,599
Unrealized appreciation on
investments and translation of
assets and liabilities denominated
in foreign currencies 91,800,361
Net realized loss from investments
and foreign currency transactions (10,448,980)
Capital shares 2,813,547
Additional paid-in capital 333,887,685
------------
Net assets, at value $418,698,212
============

Computation of net asset value and
offering price per share:
Net asset value and redemption
price per share ($418,698,212
divided by 28,135,467 shares
outstanding) $14.88
============
Maximum offering price
(100/95.5 of $14.88)* $15.58
============
</TABLE>

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1994

<TABLE>
<S> <C> <C>
Investment income:
Dividends, net of foreign
taxes withheld of $764,388 $6,670,534
Interest 1,436,937
----------
Total income $ 8,107,471
Expenses:
Management fees (Note 5) 1,960,100
Distribution fees (Note 5) 211,176
Shareholder servicing costs (Note 5) 322,833
Reports to shareholders 299,250
Professional fees 41,980
Registration fees 140,356
Directors' fees and expenses 18,752
Custodian fees 88,372
Other 21,857
Total expenses 3,104,676
------------
Net investment income 5,002,795
------------

Realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on:
Investments 350,272
Foreign currency transactions (40,140)
Net unrealized depreciation on
investments and translation of
assets and liabilities
denominated in foreign currencies (15,570,891)
------------
Net realized and unrealized
loss on investments (15,260,759)
------------

Net decrease in net assets
resulting from operations $(10,257,964)
============
</TABLE>

*On sales of $100,000 or more, the offering price is reduced as stated in the
section of the prospectus entitled "How to Buy Shares of the Fund."

The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN GOLD FUND

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JULY 31, 1994 AND 1993

<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income................................. $ 5,002,795 $ 5,052,307+
Net realized gain (loss) from investments and foreign
currency transactions................................ 310,132 (2,972,987)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies........ (15,570,891) 104,591,050
------------ ------------
Net increase (decrease) in net assets
resulting from operations...................... (10,257,964) 106,670,370
Distributions to shareholders from undistributed net
investment income..................................... (5,039,248) (5,366,761)
Increase in net assets from capital share
transactions (Note 3)................................ 39,291,074 35,513,222
------------ ------------
Net increase in net assets..................... 23,993,862 136,816,831

Net assets:
Beginning of period................................... 394,704,350 257,887,519
------------ ------------
End of period (including undistributed net
investment income of $645,599 - 1994 and $734,039 -
1993)................................................ $418,698,212 $394,704,350
============ ============
</TABLE>

+Includes realized loss of $4,563 from foreign currency transactions.

The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN GOLD FUND

NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Gold Fund (the Fund), is an open-end diversified management investment
company (mutual fund), registered under the Investment Company Act of 1940 as
amended.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.

A. SECURITIES VALUATION: Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from pricing services, which are
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific securities. Portfolio securities which
are traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Other securities for which market quotations are not readily
available, if any, are valued in accordance with procedures established by the
Board of Directors. Short-term securities and similar investments with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates value.

Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and these values are
translated into U.S. dollars at current market quotations of their respective
currency against U.S. dollars last quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
procedures established by the Board of Directors.

The fair values of securities restricted as to resale, if any, are determined
following procedures approved by the Board of Directors -- See Note 6.

B. INCOME TAXES: The Fund intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code
and to make the requisite distributions to its shareholders which will be
sufficient to relieve it from income and excise taxes. Therefore, no income tax
provision is required.

C. SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification
for both financial statement and income tax purposes.

D. INVESTMENT INCOME, EXPENSE AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount and premium are
amortized as required by the Internal Revenue Code.

Net realized loss differs for financial statement and tax purposes primarily
due to losses deferred for wash sales.

E. FOREIGN CURRENCY TRANSLATION: The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the rate of exchange of such
currencies against U.S. dollars on the date of the valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are
recognized when reported by the custodian bank.

The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.

<PAGE>

FRANKLIN GOLD FUND

NOTES TO FINANCIAL STATEMENTS (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)

E. FOREIGN CURRENCY TRANSLATION (CONT.)

Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency
gains or losses realized between the trade date and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in exchange rates.

F. REPURCHASE AGREEMENTS: The Fund may enter into a Joint Repurchase Agreement
whereby its uninvested cash balance is deposited into a joint cash account to
be used to invest in one or more repurchase agreements with government
securities dealers recognized by the Federal Reserve Board and/or member banks
of the Federal Reserve System. The value and face amount of the Joint
Repurchase Agreement has been allocated to the Fund based on its pro rata basis
at July 31, 1994. In a repurchase agreement, the Fund purchases a U.S.
government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for
as a loan by the Fund to the seller, collateralized by the underlying security.
The transaction requires the initial collateralization of the seller's
obligation by U.S. government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Fund, with the
value of the underlying security marked to market daily to maintain coverage of
at least 100%. The collateral is delivered to the Fund's custodian and held
until resold to the dealer or bank. At July 31, 1994, all outstanding joint
repurchase agreements held by the Fund had been entered into on that date.

G. CHANGE IN ACCOUNTING POLICY FOR FOREIGN CURRENCY PRESENTATION: Effective
July 31, 1994, the Fund adopted AICPA Statement of Position (SOP) 93-4: Foreign
Currency Accounting and Financial Statement Presentation for Investment
Companies. The adoption of SOP 93-4 had no effect on net assets for the fiscal
year ended July 31, 1994, but affected the classification of foreign currency
transactions from assets and liabilities other than investments on the income
statement.

2. CAPITAL LOSS CARRYOVERS

At July 31, 1994, for income tax purposes, the Fund had capital loss carryovers
as follows:

<TABLE>
<S> <C>
Expiring in: 1999 $ 2,614,651
2000 4,861,344
2001 2,947,368
-----------
$10,423,363
===========
</TABLE>

For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at July 31, 1994
by $25,619.

<PAGE>

FRANKLIN GOLD FUND

NOTES TO FINANCIAL STATEMENTS (CONT.)

3. CAPITAL STOCK

At July 31, 1994, there were 100,000,000 shares of $.10 par value capital stock
authorized and paid-in capital aggregated $336,701,232. Transactions in the
Fund's shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------------
1994 1993
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- -------------
<S> <C> <C> <C>
Shares sold.......................... 7,653,237 $ 109,797,299 6,675,118 $ 81,562,617
Shares issued in reinvestment of
distributions....................... 251,295 3,644,547 331,426 3,749,952
Shares redeemed...................... (5,455,745) (79,401,326) (4,734,125) (55,063,028)
Changes from exercise of exchange
privilege:
Shares sold........................ 34,905,973 511,582,013 30,197,593 341,612,822
Shares redeemed.................... (34,473,583) (506,331,459) (29,640,465) (336,349,141)
----------- ------------- ----------- -------------
Net increase......................... 2,881,177 $ 39,291,074 2,829,547 $ 35,513,222
=========== ============= =========== =============
</TABLE>

4. PURCHASES AND SALES OF SECURITIES

Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended July 31, 1994 aggregated $40,327,495 and
$5,129,006, respectively.

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under terms of an agreement, provides investment
advice, administrative services, office space and facilities to the Fund, and
receives fees computed monthly on the net assets of the Fund on the last day of
the month at an annualized rate of 5/8 of 1% of the first $100 million of net
assets, 1/2 of 1% of net assets in excess of $100 million up to $250 million,
and 45/100 of 1% of net assets in excess of $250 million. Fees incurred by the
Fund aggregated $1,960,100 for the year ended July 31, 1994. The terms of the
agreement provide that aggregate annual expenses of the Fund be limited to the
extent necessary to comply with the limitations set forth in the laws,
regulations and administrative interpretations of the states in which the
Fund's shares are registered. There were no reimbursements to the Fund under
this provision during the year ended July 31, 1994.

In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. received commissions on sales of the
Fund's capital stock for the year ended July 31, 1994 totaling $3,229,173, of
which $3,172,941 was subsequently paid to other dealers. Commissions are
deducted from the gross proceeds received from the sales of the capital stock
of the Fund, and as such are not expenses of the Fund.

Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Fund pays costs on a per shareholder account basis. Such
costs incurred for the year ended July 31, 1994 aggregated $322,833, of which
$300,010 was paid to Franklin/Templeton Investor Services, Inc.

Effective May 1, 1994, the Fund implemented a plan of distribution under Rule
12b-1 of the Investment Company Act of 1940, pursuant to which the Fund will
reimburse Franklin/Templeton Distributors, Inc. in an amount up to a maximum of
0.25% per annum of the Fund's average daily net assets for costs incurred in
the promotion, offering and marketing of the Fund's shares. Costs incurred by
the Fund under the agreement aggregated $211,176 for the year ended July 31,
1994.

Certain officers and directors of the Fund are also officers and/or directors
of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.

<PAGE>

FRANKLIN GOLD FUND

NOTES TO FINANCIAL STATEMENTS (CONT.)

6. RULE 144A SECURITIES

Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 1. At July 31, 1994, the Fund held one 144A
security with a value aggregating $9,121,406 representing 2.18% of the Fund's
net assets. See the accompanying statement of investments in securities and net
assets for specific information on that security.

7. FINANCIAL HIGHLIGHTS

Selected data for each share of capital stock outstanding throughout each
period are set forth in the prospectus under the caption "Financial
Highlights".

<PAGE>